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Is the rescue vessel still watertight?

Will CS First Boston still rescue Credit Suisse bankers in a UBS takeover?

The lifeboat is still there, but the waters around it are looking increasingly tempestuous. Last weekend, Credit Suisse investment bankers were hopeful that they'd be able to escape the mire engulfing the bank by moving across to work for Michael Klein at Credit Suisse First Boston.  This weekend, the CS First Boston deal itself is raising some eyebrows. 

Billed as a "super boutique" with revenues that will one day be as high as $3.5bn, CS First Boston is intended to operate as an independent capital markets and advisory bank based out of New York. A marketing document circulating about the unit in February said it would provide M&A advice, deals financing and some essential trading. Along with the investment bankers, the Credit Suisse leveraged finance business would migrate across, as would much of credit trading. Following Klein's recent town hall in New York, insiders say Credit Suisse equities professionals were also expected to be incorporated. - "The equities move was going to be announced last week," says one senior equities professional in London. "The announcement didn't happen because of events on Wednesday."

There are no indications that CS First Boston's birth is not going ahead. But neither are there any assurances that it will. The backdrop has changed dramatically. After last week's $54bn credit line from the Swiss National Bank failed to stabilize Credit Suisse's share price and reports that banks like Deutsche Bank and SocGen were restricting dealings with Credit Suisse as a counterparty, UBS is reportedly in talks to acquire its Swiss rival.

What a UBS takeover would mean for the CS First Boston deal isn't immediately clear, but it seems possible that Klein's vision of an agile "super boutique" that's simultaneously independent and yet also allied to the balance sheet of a major bank, might not work if that major bank is UBS instead of Credit Suisse.

CS First Boston already has some funding of its own. Apollo was said to be in talks to invest $750m in February and an unnamed investor invested $500m last year. Further capital was to be raised in an IPO in 2024-2025, but will this be enough? Will the market have calmed sufficiently to permit an IPO by then, and what happens in the meantime?

For the moment, escaping into CS First Boston is the best hope for everyone at Credit Suisse's investment bank. In a note last week, JPMorgan's European banking analysts predicted if UBS acquired Credit Suisse it would close down the investment bank entirely and that although this process would cost around CHF10bn in restructuring charges, it could be self-funded with asset sales. Unconfirmed reports also suggest that the Swiss National Bank would take responsibility for winding down the investment bank, relieving UBS of that responsibility.

If CS First Boston really is the lifeboat, the implication is that it may need to be ready a lot sooner than expected and that everyone will be desperate to climb onto it. Klein's $10m payment for negotiating the CS First Boston carve out looks a little premature, but he could yet justify his pay. - UBS has recently been opining about its need for some new investment banking talent; maybe Klein can persuade them that an alliance with CS First Boston would provide precisely that?

In the meantime, senior Credit Suisse insiders tell us they're hopeful that UBS will acquire Credit Suisse, "hold" the elements that will comprise CS First Boston, and then spin out the unit as planned in 2024. Nothing is assured, though. "It's not clear whether Michael Klein has rights to complete CSFB, or whether it will be off the table," says one CS veteran. "The only thing that's for certain is that Credit Suisse will be under different ownership by Monday morning."   

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AUTHORSarah Butcher Global Editor

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