Banking analyst Mike Mayo is an outlier because Wall Street’s intimidation apparently does not work on him. Mayo has written a book describing, among other things, what it was like for him to break the taboo against issuing a “Sell” recommendation on Wall Street. The title of his book, “Exile on Wall Street,” is a hint.
Mayo has worked as a bank analyst for 20 years. The job of a bank analyst, he explains, is to study publicly traded financial firms, dig into the financials and go beyond the management’s spin, reach appropriate conclusions as to whether or not each firm would make a good investment, and communicate those conclusions to institutional investors, such as mutual funds, university endowments, public pension funds, hedge funds, etc.
Banks have been terrible investments for the past decade, he says, but most bank analysts served a “cheerleaders” rather than analysts, issuing “Buy” or “Hold” recommendations rather than “Sells” because they were fearful of causing their firms to lose business revenues from those banks, and being fired for doing so.
It still goes on today, Mayo says. That is why “Sell” ratings are less than 5% of the total, “despite the fact that any first-year MBA student can tell you that 95% of the stocks cannot be winners.”
Mayo details his own experiences. In 1999, while employed by Credit Suisse, he issued a 1,000 page report that was negative on the entire banking sector. It was the opposite of what other bank analysts were saying. Mayo considered that banks were five years out from the interstate banking law of 1994, they could not keep growing through mergers and cost cuts as they had, they were making more risky consumer loans, and bank executives were receiving big pay increases including stock options, which encouraged risk-taking.
In the late 1990s, there were 100 “Buys” for every “Sell” recommendation; Merrill Lynch had 940 stock “Buy” recommendations and 7 “Sells,” Salomon Smith Barney had 856 “Buys” and 4 “Sells,” and Morgan Stanley Dean Witter had 670 “Buys” and zero “Sells,” according to Mayo.
The banks Mayo downgraded were furious; they refused to talk to him; some of them cut all ties with Credit Suisse; Credit Suisse was furious; Mayo received push-back inside Credit Suisse, did not budge, and was fired. Mayo was vindicated when the banks fell more than 20% by year-end.
The conclusion Mayo draws from all of this is that we need “a better version of capitalism,” especially better accounting and transparency, so outsiders can see the real numbers, for example, of the amount of securities and loans that are vulnerable to the European financial crisis. Most importantly, he says, there needs to be “a culture change” where analysts can analyze and communicate their honest opinions without fear of retaliation by the big banks.
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