In and out on Wall Street

So I welcomed the challenge of placing pre-conceived notions aside and objectively reviewing his book. Exile gives you a sense of Mayo’s roots, his rants, his ratings, and his recommendations for the industry’s future.

Mayo is not your ordinary guy. He is maniacal in his work, exercise regimen, and self-certitude. Nor is he shy about reminding us about his work ethic, his honesty, and how misunderstood he is. On the other hand, his attitudes can in parts be refreshing. In an industry where it can be more lucrative to follow the herd, stay positive on bank stocks, reap the underwriting benefits that go apparently go hand-in-hand with flattering coverage, Mayo is a fierce contrarian.

His background and where it led him, open Exile.

 

 

Son of Eastern European immigrants and a graduate of the University of Maryland, Mayo believes he lacked the Ivy League connections to land his first dream job in New York. So, he gained his entrée to banking as a staffer at Federal Reserve Board headquarters in the early Greenspan years. Mayo’s account of his 20-plus years as a bank analyst spans his formative years at the Fed to his hard-fought-for posts at numerous investment banks. (Today he is managing director at Credit Agricole Securities.)

His accounts of his Fed colleagues’ integrity are glowing, casting them as humble public servants zealously safeguarding the soundness of the banking system. The account is nostalgic--the first chapter is actually titled “’God’s Work’ at the Fed,” a play on Lloyd Blankfein’s notorious 2009 statement on the work being done at Goldman Sachs. But Mayo’s certainty about the uprightness of the Fed in those days (the late ‘80s and early ‘90s) is endearing. This is a guy who really, really wants to do the right thing and to be around people who share his convictions.

He leaves the Fed when, after nearly a year of hounding prominent New York bank analysts, he lands an associate analyst position at UBS. And so begins his foray into the world of sell-side equity research on banks, and his experience with the analysts and bank executives he meets along the way.

After moving on to Lehman Brothers two years later, Mayo is effectively plateaued and, as he tells it, pushed out by the firm’s investment bankers for placing sell ratings on the banks he covers. Next stop is Credit Suisse, from which he was fired, followed by six months of unemployment. Mayo eventually finds work at Prudential, where he writes that he’s finally able to run an independent research shop where objectivity is not only permitted, but encouraged.

Alas, Mayo finds that objectivity has a price.

This time around, when Mayo places sell ratings on banks, he faces exile from bank management teams, rather than pressure from his firm’s investment bankers. When Prudential begins finding it difficult to fund research without a robust investment bank, Mayo moves to Deutsche Bank during the run-up to the crisis beginning in 2007.

While hearing Mayo’s career story, the reader gains a greater understanding of Wall Street from an atypical perspective. Mayo nicely lays out the reasons why, in an industry rife with often-criticized compensation systems, the structure of the sell-side research world is especially twisted.

In essence, to a securities firm, a sell-side analyst and his research team is overhead.

Analysts spend lots of time and money researching and publishing reports for clients who utilize their firm’s trading and brokerage services. It sounds good in theory: you agree to execute your trades through my firm, and I’ll provide you with research to guide your decisions.

But, trading only generates so much revenue.

 

In the trio of investment banking services-- research, sales and trading, and advisory services--Mayo explains, the true money-makers are the teams underwriting the debt and equity offerings and advising corporate clients on mergers and acquisitions, and other corporate initiatives. The fees are very lucrative, and firms in part rely on the analysts to maintain positive relationships with the companies they cover to ensure that the underwriting and advisory business keeps coming.

Throughout the book, Mayo hammers home his point that investment bankers rely on their firms’ research analysts to maintain positive relationships with the banks they cover. When things are good and the stock’s outlook is strong, the analyst gives it a buy rating and everyone is happy. But when the fundamental profitability trends of an entire industry are challenged, a neutral observer would expect the analyst’s reports to reflect this shift, with downgrades to hold or sell being in order.

But think of it this way: You’re a bank chief financial officer who sees rising credit problems and lower profitability--perhaps even losses. You need to raise capital pretty soon to build a buffer for future losses. And the sell-side research analyst who covers your bank just downgraded the stock. How likely are you to use that analysts’ firm for your upcoming capital raise?

Mayo’s tale offers his own experience trying to swim against this current. He details his firing by Credit Suisse, which followed his call to downgrade 47 banks in 1999--on signs of declining asset quality, excessive executive compensation, and headwinds following an M&A wave from the previous few years. Though in hindsight his call proved accurate, the banks that Mayo downgraded were furious. Management teams shut him out of meetings and--more to Mayo’s point--shut out Credit Suisse’s investment bankers, cutting off revenues from the banks Mayo covered.

Remember, analysts are cost centers. Mayo was gone.

And that wasn’t the end of Mayo’s periodic exiles. Over the course of the next decade or so, Mayo recounts being shut out of bank management meetings and earnings calls. Interesting are his view of other analysts. He portrays them as phenomenally biased cheerleaders for the stocks of CEOs who showered them with lavish gifts and ego-boosts, while Mayo did the thankless but virtuous work of shining the bright light of truth into the dark corners of the industry.

 

Mayo tells quick and entertaining--albeit somewhat sanctimonious--stories of the pressure to publish positive research on an industry with less-than-positive fundamentals. He recounts stories of bank executives ignoring analysts’ calls, refusing to acknowledge what he describes as obvious accounting deficiencies and disclosure failures, and dismissing alleged regulatory pressure to address risk-management concerns.

However, with almost every story I wanted to hear more. Mayo’s engaging style introduces unique corporate personalities and sagas--each just long enough to grab your attention--interspersed through his personal account of his career. But I wanted more detail, more analysis. What I was hoping for in this book--a reasonably objective insider’s view into the shortcomings of an industry now in recovery and transition--is not what Mayo gives us.

This is not a banker’s book. It is not a technical dissertation on the failures of a financial system and its regulators. Rather, this is one insider’s candid, yet imbalanced, view of a financial system that he portrays as stunningly complex, broken, and--at its core--greedy. So, if you like your villains cloaked in black and your heroes (including this memoir’s protagonist) sporting white hats, then this book is for you. It is not if you’re hungry to have someone interpret the many shades of gray and unearth the many layers of complexity that are the reality of our system.

Where the book loses focus are the two full chapters dedicated to the rise and frequent falls of Citigroup. I found Mayo’s extensive history of Citigroup’s failed leadership and lack of strategic execution fascinating, but overdone. If Mayo’s thesis is that independence in the role of analyst is critical to providing investors fair and balanced recommendations, the Citi diatribe is outsized amongst the other neat and quick vignettes.

And, following the incredibly detailed Citi chapters, Mayo’s concluding thoughts on the industry are somewhat underwhelming.

In one chapter of just 19 pages, Mayo outlines what he perceives to be the greatest problems of the industry and its regulation. He calls for “A Better Version of Capitalism,” the name of one of his last chapters, achievable by finding solutions through his so-called ABCs: Accounting (better standards), Bankruptcy (put accountability in the right place and allow big banks to fail) and Clout (make sure the deck isn’t stacked for insiders and against outsiders). His recommendations are thoughtful, but brief. It’s an underwhelming, though ardent, petition for sanity in the industry and in regulation. His point is, if these things are fixed, then Mayo can do his job--and all analysts can be objective, providing another check on the financial system. If only it were so simple.

 

I liked Mayo’s book as far as it went. It’s remarkably simple, and a very manageable length. As it is, it’s an entertaining tale of conviction, rejection, and a heaping dose of hubris. It’s also a bit of a manifesto on passion and integrity. It’s refreshing, though wrought with a self-serving writing style I could do without.

That being said, to be clear, this is not the best book on economics and banking I’ve ever read. I won’t recommend my bank clients run out and buy it, but I’ll likely add the examples from this book to my mental files of what to reference when persuading clients to develop a healthy respect--but not a pandering adoration--for the analysts covering their stocks.

If analysts are doing their jobs right, there may come a day when the opinion won’t be glowing, and a management team has to be able to accept this. And as Mayo proves, that is not an easy thing to do.

 

 

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