Mike Mayo on bringing high finance to book

The scourge of the banking establishment says shutting out analysts just makes things worse

In a world where the Wall Street creed ‘greed is good’ rules, Mike Mayo has combined ambition with an integrity that has puzzled and angered some of his peers.

He is not a temperamental bear. Indeed, until the end of the 1990s he was bullish on banks but, as the century turned, he became negative.

For a Wall Street analyst, especially in the days before Regulation FD, going bearish on any stock – let alone a whole sector – is a career-challenging exercise in foolhardiness: your ‘buys’ will be interred with you in your bonus, your ‘sells’ will bury you. Credit Suisse fired Mayo.

‘I was betting my career on a principle, my right to say truthfully what I thought about the banks I covered, and that made others suspicious,’ he says. ‘They thought I had some ulterior motive, some angle I was playing that they couldn’t figure out.’

While his bearish assessment of the sector was bad enough, it was his sell on Citi that really put him in the firing line. He was refused access to management, frozen out of calls and questions, and made an object of public mockery by senior management.

With grim vindicated satisfaction, he can now point to the precipitous decline in shareholder value for the banks in general and Citi in particular.

But there have been few apologies to the analyst whom Fortune credited as one of the eight who foresaw the crisis and who was the only one to testify before the Senate Banking Committee in 2002 on conflicts of interest. He returned to it in 2010 to explain what had happened.

Mayo records the resulting tussles in his book, Exile on Wall Street: one analyst’s fight to save the big banks from themselves, which, he says, ‘took me 11 years to write. I’m not writing another one.’

Exile on Wall Street coverPointedly written in plain English, it should be required reading for anyone involved in analysis or IR. Indeed, it is almost an anti-text book, a guide to how not to practice investor relations.

Mayo began his career with the Federal Reserve in Washington, and took some years to get into Wall Street, handicapped as he was by the lack of an Ivy League pedigree.

And he is still shocked by his discovery that many of his analytical colleagues simply entered managements’ figures in their spreadsheets and reproduced them without further analysis.

Lack of cynicism

Mayo’s refreshing lack of cynicism is evident throughout the book – like when he was introduced to a compensation consultant after a major merger as the man who had made it all possible.

In other words, the merger depended not on efficiencies, synergies and other such buzzwords, but on framing extra-large payments to the executives concerned so they could get lost in the costs of the operation – which also included the large fees being charged by all the advisers to the deal.

Mayo didn’t upset only the banks he covered, but also colleagues in the deal-making side of companies like Lehman and Credit Suisse, who were put out when Mayo’s impartial analysis led to their clients taking their investment banking business elsewhere.

Even money managers whose investments would have benefited from his advice would take him aside, whispering admonitions about playing the game. It is clear that the much vaunted ‘Chinese walls’ in the industry were as leaky as the Titanic.

If he had been an auto analyst or a retail analyst, for example, and treated in the same way, it would have been distressing, reminiscent of the firing of Marvin Roffman a decade or so ago for looking under the tables at the Trump Atlantic City casinos.

But the banks Mayo covered are Wall Street banks. They are more than a mere sector or industry; they are the hyper-sector, the conduit by which the rest of industry and society is financed.

And, as 2008 demonstrated, they can bring the wheels of industry and commerce grinding to a halt across the globe.

Common sense remedies

Mayo’s book was finished before the Occupy Wall Street protests focused media and public attention on much of what he was saying and, although he did not take his sleeping bag down to Zuccotti Square, he considers that what they want is the same thing: corporate transparency.

His prescriptions for achieving this transparency are common sense, generally accepted by all but those who benefit from blatantly disregarding them. Boards of directors should ensure CEO behavior and emoluments are genuinely tied to long-term interests, for example.

‘They have not been doing their job properly,’ Mayo says, suggesting that serious scrutiny of many M&A deals of recent decades would show they did little or nothing to enhance shareholder value.

This, he says, demands ‘skin in the game’: there have to be downsides as well as upsides for financial conjuring, and he points admiringly to Brazil, where bank directors are personally liable for losses.

If the industry does not police itself adequately, the alternative is further regulation – a necessary consequence of expecting the taxpayer to be the banks’ backstop of last resort.

Looking at the length and complexity of the Dodd-Frank Act, Mayo suggests that the answer is fewer rules. His subversion, however – both in the book and in conversation – is the refreshing view that people should have integrity and apply the rules.

He is a true believer in capitalism and competition, but equally firmly believes checks and balances are necessary. He sounds almost naive in his hopes that people will do the right thing, but has his feet firmly on the ground.

People need to be encouraged to do the right thing, Mayo maintains, and discouraged from doing the wrong things.

The IRO position

Mike Mayo is laid back about the behavior of IR departments, whose role he takes very seriously. ‘I’ve had run-ins with many of the big firms I cover,’ the controversial banking analyst says. ‘Sometimes I wrote a research report or asked a ‘sensitive’ question on a previous call, so I wouldn’t be allowed to ask further questions.’

Disclaiming knowledge of any IRO who resigned over such breaches of professional standards, he chuckles indulgently, ‘Who do you blame: the foot soldier or the general making the decisions? There’s never been an instance where someone has said, This is wrong. I’m going to stand up for my principles, and stepped down.

‘IR people have families, too, and are just trying to make a buck. The savvy ones say, We’re really sorry we couldn’t get your question in. We’re going to try to get you in as quickly as possible. It’s savvy – up to a point. But after a few years, you catch on.’

The book has a bushy-tailed optimism about how the system works and Mayo admits, in retrospect, ‘the biggest mistake I made over 20 years was not reading enough into the defensiveness of these companies. Invariably, if they shut you out or push back, it’s a sign they are trying to hide something.

‘Capitalism is a great system, but let’s allow it to work. Undue influence to manipulate the flow of information, that’s not how it’s supposed to work, and IR people are on the front line of that. They represent the corporations that play such a large part in our country and if they don’t do their job properly, capitalism’s going to suffer.’

IROs often claim to be a conduit of information to the top, and Mayo agrees. ‘IR professionals provide a service aggregating that information, but I would really like to see them take it to the board,’ he says. That is a much better role than ‘simply protecting top management from bad practices. If they shoot the messenger from outside, what kind of signal does that send to people on the inside? How they treat Wall Street analysts like me is an indication of how companies are run.’



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