A rebel in the ranks: Mike Mayo on Wall Street
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Stock analysts are not known for being a rebellious sort -– their jobs generally involve writing up dry technical reports on public companies. But Mike Mayo is not your typical stock analyst. Since joining the industry nearly 25 years ago, he has shaken up the financial world with his bold and forthright analysis of the banks he researches.
In 1999, he told investors to sell all bank stocks. In 2007, he was ahead of the pack in downgrading Bear Stearns and Citigroup. (A fuller record of those calls is here.) Perhaps predictably, this hasn’t earned him a lot of love, given that he has worked at banks himself and that his employers wanted to do business with many of the banks he was analyzing. This led to often short and stormy tenures at UBS, Credit Suisse and Lehman Bros. before he landed in his current position at Credit Agricole Securities.
Now, after a financial crisis for which banks have taken much of the blame, Mayo has written a book, ‘Exile on Wall Street,’ chronicling the problems he sees with the current system in place for monitoring the financial system. He argues that regulators, accountants and credit ratings agencies do not have the right incentives to serve as good watchdogs. He slams his fellow stock analysts for providing misleadingly positive portrayals of public companies due to conflicts of interests. Money & Company connected with Mayo to talk about his views.
Money & Company: What is the basic issue you are confronting here?
Mike Mayo: Less than 5% of stock ratings on Wall Street are a negative rating. Any first-year business school student can tell you that not 95% of stocks are worth buying.
M&C: You say that there is pressure on analysts to write positive things about the companies they are covering. What is your own experience with that?
MM: I had some of the best stock calls at Lehman. But the deal-makers -- the investment bankers at the firm at the time -- didn’t like what I had to say.
I thought my goal was to serve the people putting their money into the stocks of these companies, whereas the deal-makers wanted me to be nicer to the big banks so that they might be able to raise stocks or raise debts or advise on some sort of merger.
Eventually when I left the firm, I was literally escorted out of the office.
M&C: The idea that Wall Street analysts are afraid to say sell, how does that impact ordinary investors?
MM: The rose-colored lenses –- the positive bias to the markets –- I think contributed to some of the excess in the markets. Having Wall Street analysts and other market overseers do more of their job –- and to call a spade a spade -- can help reduce the degree of the huge swings that we’ve seen.
M&C: What are the problems at banks that analysts and executives are downplaying today?
MM: This year will show the slowest revenue growth for U.S. banks since 1938, and this decade will be the slowest decade of revenue growth since the Great Depression. I think the banks are downplaying just how much revenue pressure they are likely to feel, and as a result, they have been slow to better position their companies for that environment.
You saw in the case of MF Global what happens if you don’t accept the slower growth. Either you accept the slower growth or you reach for revenues and risk failing.
M&C: Banks have said that the new financial reform laws go too far, while the public seems to think they didn’t go far enough. Which is it?
MM: I’m not so sure that the size of legislation is what makes difference. I think you could have less legislation as long as it is actually enforced. We haven’t had it enforced. Right now, we have the worst of both worlds, and I still see that in place, even after the crisis.
M&C: Where does Occupy Wall Street come into all of this?
MM: I do research on Occupy Wall Street because I wonder if that could be extra motivation for regulation on the banks.
When I go to Occupy Wall Street, or Occupy San Francisco today, I’m the banker in the dark blue suit.
I go to the table with the anarchists. It’s a table like you’d have at a bake sale. I engage the people behind the table in a discussion.
I disagree when you start talking anarchy -- or some real socialist form of government -– but I do believe in the idea that we should have more alternatives within our capitalism system than what we’ve had, that we should not just accept the status quo. Enough already with what hasn’t worked.
M&C: How widely is that sentiment shared on Wall Street?
MM: A lot of people on Wall Street are very frustrated with parts of Wall Street. Different operators operated on steroids -- and some of those operators blew up and tainted the industry.
-- Nathaniel Popper in New York