The resurrection of First Boston

In September, a group of mostly retired investment bankers met at an annual charity dinner in New York. As they reminisced about their glory days some four decades ago, a rumour was also doing the rounds: their old firm, First Boston, was soon to be resurrected.

The rumour became closer to reality in October when Credit Suisse, which bought First Boston in the 1980s before retiring the name some 20 years later, said it had decided to spin off its investment bank as part of a restructuring.

This week Credit Suisse bought back the First Boston brand which will front the spinout headed by its former board member Michael Klein.

While the prospects and shape of the new firm are uncertain — Klein must raise billions to back the project while also figuring out how much balance sheet the business will require — for a certain generation of Wall Street, memories of First Boston remain clear.

For at least a while, First Boston carried the prestige of a Goldman Sachs or Morgan Stanley and its roster of alumni — including the likes of Bruce Wasserstein, Larry Fink, Adabeyo Ogunlesi — reached the stratosphere of high finance.

As recently as this year, one former Credit Suisse banker said alumni would give their name and then say “First Boston” when answering the phone.

However, the First Boston Corporation had been based in Manhattan for decades. The Glass-Steagall Act of the early 1930s forced financial institutions to split their commercial banking and securities businesses. Like Morgan Stanley separating from JPMorgan, First Boston became the distinct Wall Street unit of the First National Bank of Boston.

First Boston would become a so-called “special bracket” firm, referring to the largest underwriters of equity and debt offerings whose names appeared at the top of deal prospectuses. Its rivals were heavyweights including the likes of Dillon, Read and Kuhn, Loeb.

Through the 1950s and 1960s, investment banks mostly focused on helping corporate clients raise money through selling stocks and bonds.

But a new business line and a seemingly unremarkable hire in 1972 would prove crucial to First Boston’s rise. The son of Italian immigrants, Joe Perella joined First Boston after graduating from Harvard Business School. He had spent several years in public accounting and at First Boston would rise as one of the first specialists in the nascent field of mergers and acquisitions.

In 1977, Perella hired a talented young corporate lawyer, Bruce Wasserstein, and over the next decade the pair would become the biggest rainmakers on Wall Street. The advent of junk bond financing proved to be the fuel for the age of corporate raiders and hostile takeovers.

First Boston professionals recall the 1980s as an exhilarating time. Perella and Wasserstein would become acclaimed for the imaginative deal structures they conceived for and against the likes of T. Boone Pickens and Getty Oil and for pioneering the aggressive soliciting of new clients, rather than relying on longstanding relationships to pull in deals.

“Bruce just dazzled clients with his brilliance. He had a reputation for being creative. Clients wanted to hear him speak”, said Maynard Toll, a banker in the merger group at the time.

With its meteoric success, First Boston became a destination for top talent. Among the junior bankers who started there were Raymond Maguire, who eventually became vice-chair of Citigroup, Adebayo Ogunlesi, founder of Global Infrastructure Partners and the current lead director of Goldman Sachs, and Douglas Braunstein who became the chief financial officer of JPMorgan.

By the late 1980s, the First Boston merger department had become the focal point of the firm. And while the broader organisation benefited, Wasserstein wanted more control, to reflect his unit’s pre-eminence.

In early 1988 after Wasserstein was told by Peter Buchanan, his then First Boston boss, that his request for more power was being denied, he and Perella quickly departed with several colleagues to start their own boutique firm — Wasserstein Perella. That year, a talented First Boston mortgage bond trader who had suffered losses, Lawrence Fink, would also leave to start a money manager that would eventually become BlackRock.

“The loss of Perella and Wasserstein was a body blow from which we never really recovered,” said Jim Maher, a longtime First Boston merger banker who took over leadership of the group after the pair left. “The firm was successful but lost its dominance because part of the profit centre left.”

Even as the deal advice business remained highly lucrative, investment banks of the 1980s increasingly risked their own balance sheets, especially in providing equity and debt financing for leveraged buyouts, a trend led by the junk bond house Drexel Burnham Lambert.

High returns meant high risk and First Boston suffered significant paper losses on bridge loans extended to such companies such as Ohio Mattress, Campeau and Long John Silver’s. With the US economy slowing down, stocks crashing at the end of the decade and the M&A group battered, First Boston was eventually forced into the hands of Credit Suisse.

Since 1978, the two firms had shared a joint venture in Europe known as Financiere Credit Suisse-First Boston.

In October 1988, Credit Suisse announced that it would acquire the shares of the listed First Boston it did not already own at an aggregate price of $1.1bn. The US business would first go by the name of CS First Boston, followed years later by Credit Suisse First Boston. In 2005, the First Boston appellation was dropped altogether.

Today, Credit Suisse, in need of its own capital injection, says that its spin-off will draw on the “rich heritage” of First Boston to compete as a firm straddling the line between boutique and bulge bracket investment banks.

According to the press release, the new First Boston “is expected to be more global and broader than boutiques, but more focused than bulge bracket players.”

It will be months, at least, until the new First Boston takes shape. And while one ex-First Boston executive praised Michael Klein as an “exceptionally talented and networked banker”, they also said not to underestimate the challenge of building a firm from the ground up.

But no matter how the latest incarnation of First Boston turns out, the original group’s pride remains.

“To this day I admire and respect that assemblage of alumni, reminding me of how gratifying it was to be part of the First Boston team in its glory days,” said former managing director Rich duBusc.

Additional reporting by Joshua Franklin