Exile On Wall Street

Mike Mayo, “Exile On Wall Street: One Analyst’s Fight To Save The Big Banks From Themselves”  Wiley, 2012, 175pps

This book centers around one truth: the financial crisis hasn’t changed a thing in how big banks operate.  Their persistent and continuing risky practices are diminishing capitalism and the banking sector.  The risks are defined in this book by Mike Mayo, who has been a top ranked banking and finance analysts for the past twenty years.  He started his career working for the Fed and then worked at Wall Street firms including UBS, Lehman Brothers, Credit Suisse, Prudential Securities, and Deutsche Bank.  He currently serves as Managing Director at Credit Agricole Securities. 

One of the most convincing endorsements of this book comes from Paul Volcker: “Mike Mayo is an old-style bank analyst—thorough, independent, honest—who never pulls his punches, whatever icons, public or private, may be wounded.”

It’s possibly anti-climactic to go through the same litany of causes from discussing the folly of regulators career paths leading to those they regulate, to privatized profits for the bankers and socialized risks for the taxpayer, to politicians’ “influenced” by bankers and bankers instrumental in writing their own rules,  to too big to fail and getting bigger.  And, of course, accounting rules that can be bent, twisted, and used to hide problems… none of this is new.

My Notes:

Pg. 7:  This is not a book solely about the latest financial crisis.  Instead, it is about the larger historical arc of the banking industry and how the author has spent his career trying to warn investors and banks about the problems he has seen.  Most of the behaviors that caused the crisis were in place long before the 2008 downturn, and—even worse—most have not changed since then.  Some people want to look at the recent crisis as an isolated event, a single discrete occurrence that can be sealed off and looked back on in the past tense.  That’s not accurate.  The crisis didn’t occur because of something that banks did.  Instead, it was the natural consequence of the way banks are, even today.

Pg. 103:  Lehman’s collapse would trigger a devastating and completely unprecedented period on Wall Street.  Fannie Mae and Freddie Mac were placed in conservatorship that same month, September 2008.  Washington Mutual filed for bankruptcy, and Merrill Lynch was sold to Bank of America.  In mid-September, the SEC banned shorting of any financial stock.  A few weeks later, Wachovia started to run out of liquid funding sources and ended up owned by Wells Fargo.

In mid-October 2008, the Treasury injected $125 billion in preferred stock in nine large U.S. banks.  The author pegged the losses at that time at around $1 trillion, at a time when the banks had about that much in total equity.  In other words, if you valued all assets at their current market worth, the industry was likely broke.  Because of that, Treasury temporarily suspended the rule that banks had to fairly value their assets.  (In fact the author estimates that in 2011 the banks are still sitting on about $300 billion in losses due to problem assets from the crisis that don’t show up because of leeway in accounting rules). 

Pg. 104:  In hindsight, what’s most surprising about the financial crisis is how little of it is actually new.  People have done all sorts of investigations and analyses and books about the crisis, and they all identify the same factors: a flood of risky mortgages, banks getting too aggressive about growth, and toothless regulators.  Throw in a few other factors, such as interest rates that were too low for too long and overt government support of the housing sector, and you’ve got most of the root causes.

Pg. 107:  In reality, banks should function more like utilities.  You never hear about a water company executive making $30 million a year, and the water’s never turned off because some trader shorted an aquifer.  The author details the history of Citi bank as an example of what is wrong with the system and has been since 1921.