It's a dank, sunless day in New York, and by late afternoon, bands of dark rain clouds have started moving over the crowded, makeshift camp in Zuccotti Park.
Four miles uptown, analyst Mike Mayo is sitting in his small, one-window office at Credit Agricole Securities (USA), the brokerage that hired him in 2009 to cover the U.S. banking sector. Winter is still a few weeks away, and the bleak weather has Mayo wondering if the Occupy Wall Street crowd will stick around long enough to actually develop any coherent ideas for fixing the U.S. financial system—or whether the movement will be nothing more than a disorganized expression of the frustrations he himself has experienced for the more than two decades he's been observing and wrangling with big banks.
Love him or hate him, and you'll find plenty of both sentiments among the financial cognoscenti, Mayo has long been a critic of unbridled pay packages that enrich management even when investors don't share in the good fortune. He's tried to shed light on accounting tricks that can make corporate ledgers look healthier than they are, and he has never been afraid to get negative on banks, even in periods when bearish calls on the sector were rare.
Though Mayo disavows the fringe elements that glommed onto the Occupy Wall Street movement to seize on the publicity, he scoffs at those in finance who have roundly dismissed the protesters as out-of-touch anti-capitalists.
"I'll introduce you to some anti-capitalists, and that's the CEOs of big banks," Mayo says, the pitch of his voice ascending. "I'll show you socialists: socialists are government officials bailing out the bad banks along with the good banks."
But while he harbors many of the mainstream frustrations aired at Occupy Wall Street—about a month into the protest, he brought his 9-year-old son to Zuccotti Park for an object lesson in the issues dad grapples with at work every day—Mayo is adamant, to a degree that would likely turn off many in the movement, that there is nothing wrong with the underpinnings of the U.S. financial system. "Capitalism didn't cause the problem. A lack of capitalism caused the problem," he says.
As a securities analyst covering bank stocks, Mayo's aspirations go well beyond having his best investment ideas validated by the market. His goal now is nothing short of helping the country figure out how to practice a purer form of capitalism. "What's unconscionable," he says, "is that after the system almost blew, you still have all these anti-capitalist practices."
Mayo offers a list of proposed fixes in "Exile on Wall Street," an autobiographical account of his career, published in November. He writes that companies should have to disclose material risks earlier, and with greater detail, so that banks, for example, would have to provide a fuller accounting of the potential legal expenses tied to things like securitized mortgages. He suggests that auditors, for all the hours they spend analyzing company books (and the big fees they collect for doing so), ought to be providing investors with more actionable information, and detailed assessments that go beyond a simple pass/fail test.
He says that financial statements should reflect the substance of transactions, and not just the legal mechanics of them, to curtail the shifting around of assets and liabilities done for the sake of window dressing, as in the notorious Repo 105 transactions carried out by Lehman Brothers. And using examples from his own career and from his observations of the regulatory community, he argues that more must be done to transfer clout from big bank executives to regulators and others in a position to provide a check on the markets.
It all sounds quite reasonable. And yet sitting in Mayo's office—a cramped space with metal filing cabinets and a bookshelf filled with the thick volumes of research his prolific team has produced over the years—I can't shake the sense that there's a Quixotic aspect to his determination. Even an industry giant like Paul Volcker, whose counsel was specifically sought by bankers and politicians, found many of his ideas marginalized or watered down. What hope could anyone else have for effecting change?
More specific to Mayo, if lawmakers, regulators and commercial bankers suddenly looked outside the traditional sphere of political influence for fresh ideas about the financial system, what are the chances they would be willing to take their cues from a sell-side Wall Street analyst?
It's a surreal thought: the solution to the manipulation of the financial system coming from a profession that once celebrated the likes of Jack Grubman and Henry Blodget. I mention this to Mayo, who takes the observation in stride. He acknowledges that his field has been tainted by scandals like the ones that came to light after technology stocks crashed in 2000. "After that, our salaries were lowered, and now I have a piece of paper I have to sign once a quarter" testifying to his credibility as an analyst.
But Mayo says that being an analyst gives him a platform from which he can speak directly with management and investors, positioning him as someone who can change the system from within.
"I think I had a eureka moment a year or two ago when I thought, 'Why isn't someone doing something about this? And it occurred to me ... I could be that person," he says. "I can influence this bank by bank, person by person."
Perhaps Mayo is what Occupy Wall Street needed from the beginning—someone who not only gets why so many Americans feel disenfranchised from the financial system, but who possesses both the ability to translate those feelings into the vocabulary of finance and the megaphone to reach big-bank executives.
As Mayo sees it, banking has its own version of the 99 percent versus the 1 percent. "There are 2 million employees at FDIC banks. I am for the 99 percent of bankers who acted well." But he feels it's his duty to call out "the 1 percent" of bankers who, he says, unfairly manipulate the system.
The idea of an unlevel playing field is something Mayo began thinking about long before the financial crisis. In the late 1980s and early 1990s, while working in the merger-applications division at the Federal Reserve, he observed the cozy relationships that some regulators would maintain with banks, parlaying the connections into lucrative private-sector work when they were ready to leave their government jobs. (Mayo was afforded no such advantages when he made the leap to Wall Street in 1992 as a junior analyst at UBS. He had been low on the totem poll at the Fed, with no "ins" to speak of at any of the big securities firms, and he still has a stack of rejection letters that prove it.)
As Mayo's sell-side career progressed, bringing him from UBS to Lehman Brothers and then to Credit Suisse, he compiled more observations about the ways in which the system is manipulated—by corporate executives with the chutzpah and clout to quash public dissent, and by investment bankers, ratings firms and accountants conflicted by their need to win business from the very companies that their firms are supposed to be evaluating.
In 2003, Mayo sent the William Morris Agency a manuscript he had started writing three years earlier, when he lost his job at Credit Suisse. (The firm had merged with DLJ, and it opted to keep DLJ's bank stocks research team instead of Mayo's.) "I had so much energy and I was at the top of my game, and I was fired," Mayo says. "So I used some of my energy to write my book."
He called it "The Fight for Capitalism," and it got rejected by the literary agents at William Morris. But by the end of the decade, the manuscript's key themes would become a lot more resonant.
In the interceding years, Mayo's team had a high-profile run at Prudential Securities and a headline-making jump to Deutsche Bank, arriving there just in time for the financial crisis. His years of bearishness on banks proved prescient, but he had his missteps as well, including the "buy" rating he kept on shares of Lehman even as the firm started its tailspin.
In March 2009, Mayo joined Credit Agricole Securities, an affiliate of CLSA Asia Pacific Markets, which was expanding its U.S. research and sales group. Citing Mayo's 1999 sell call on the entire bank sector, the press release announcing his hire said he was the right fit at a firm where "anti-consensus calls are the order of the day."
As the scope of the financial crisis got clearer, Mayo's new bosses suggested he write a book. He already had the framework. Now he had several more years' worth of observations to weave in, along with the story of a financial calamity that perfectly illustrated his biggest complaints about the industry. "Exile on Wall Street," published by John Wiley & Sons, "is 25 years of frustration coming out," Mayo says.
He describes his run-ins with the investor relations departments of several banks he has criticized. And he writes at length about his history of butting heads with Citigroup, on everything from access to management (Mayo claims to have been frozen out from meetings at least twice in the past decade) to the stated valuation of Citi's deferred-tax assets (Mayo thinks they should be significantly lower).
What Mayo is best known for, though, are his bearish calls on bank stocks. At press time, he only had "buy" ratings on five of the 19 banks he covers: Goldman Sachs, JPMorgan Chase, Northern Trust, State Street and Wells Fargo. That leaves more than twice as many big bank stocks that he predicts will lag the market. (Fittingly, his firm doesn't take "neutral" positions on stocks—it's buy, underperform or sell.)
"Banks can't escape the environment they operate in. It's an easy call that this decade is going to be the worst revenue-growth decade since the decade of the Great Depression," Mayo says. "The ultimate bullish case is that banks become boring—steady dividend, maybe grow some. Now that's a long-term, investable theme."
Heather Landy is editor in chief of American Banker Magazine.
