Exile on Wall Street: One Analyst's Fight to Save the Big Banks from Themselves [Englisch] [Gebundene Ausgabe]

This book is important because it goes to the heart of one of the great tragedies of our generation, the financial collapse of 2008. The big "money center" banks were the epicenter of the financial meltdown. If the government had not infused these banks with nearly a trillion dollars of public money the financial system would have failed and we would have regressed to a stone age economy.

Most of the TARP money has since been repaid, but the wreck and ruin the big banks inflicted on this country lingers. Eight million jobs were destroyed in 2008. Even now three years later we are creating only 1/3rd as many jobs as are needed to absorb the entry of young workers into the labor force. The banks spread their toxic web of mortgage derivatives across the financial markets, wiping out tens of millions of retirement accounts. The banks enticed non-creditworthy customers to take out mortgages and home equity loans that were impossible to service after the economy went bust, wrecking the housing market with a flood of foreclosures.

The big banks caused tens of millions of Americans to lose their jobs, their pensions, and their homes. They have devastated our economy as surely as would a nuclear war. They have stolen the wealth of a generation.

Author Mike Mayo, who made a career as a Fed regulator and financial analyst, identifies three primary causes of the financial collapse.

First is the incestuous relationship between the big banks and the political parties. Both political parties have tried to sweep the financial fiasco under the rug because both were complicit in enabling it. The big banks provide much of the funding for both parties' political campaigns. Presidents from both parties draw their financial advisors from these banks, whether it is Hank Paulson advising President Bush or Tim Geithner advising President Obama. During the 1980s and 1990s these banks lobbied Congress to REPEAL vital regulations like the Glass-Steagall Act that were enacted during the Great Depression to prevent the banks from defrauding their customers. As soon as Glass Steagall was repealed the bankers went right back to their old ways of taking their depositors' money and gambling it away with reckless speculations.

Mayo explains how the big banks dominate congresses and presidents:

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Bloomberg Businessweek ran a March 2011 profile of the chairman of Citigroup, Dick Parsons, which included some quotes about the events of the financial crisis. As Parsons described it, "Timmy Geithner would say, 'Call me directly because this is too important an institution to go down.'" You read that right: Parsons called the Secretary of the Treasury "Timmy" in an interview, which does not exactly acknowledge the authority of the Secretary, a post once occupied by Alexander Hamilton. He also talked about why the government had to bail Citi out, by describing the likely consequences if the company had been allowed to go under: "You wouldn't be able to buy a loaf of bread or clear a check," Parsons said. "It would be like Egypt. People would be out on the streets." Can that really be true? Citigroup's continued existence is the only thing separating the United States and Egypt?

What comes across in the profile is a sense of arrogance and insider access. It was the equivalent of flipping the bird at shareholders, the Treasury, and the country at the same time. I get frustrated with banks--I get furious at times--because they should hold themselves to a higher standard. Irresponsible actions by these institutions have put our economy and our entire capitalist system at risk, and the rest of the world has noticed. In August 2011, the Russian prime minister, Vladimir Putin, said that the United States is "living like parasites" off the global economy.

Even after the shortcomings exposed during the crisis, banks still show aggressive accounting and opaque disclosures. Even after CEOs of failed companies walked away with eight-figure paychecks, compensation is still rigged in favor of senior management. Even after big banks used their power to get rules changed that helped their companies--or, really, their senior managers (after all, most of the rank and file at banks are more like Main Street than Wall Street)--the companies use their power to block actions that would allow for better checks and balances. Lumped together, all of these actions lead you to wonder: "How did they get away with it? And how is it still happening?"
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As if we needed any more examples, we have a breaking scandal this very day (November 5, 2011) in the collapse of M.F. Global, yet another financial firm wrecked by a political insider, a former New Jersey Governor and Senator. This banker-turned-politician-turned-banker is alleged to have used his influence to persuade government regulators to refrain from doing their jobs of regulating his fund. The result: another bankrupt financial company with $630,000,000 of customers' money gone missing. How much more of this do we have to put up with?

Mayo says that the second problem is the corrupt relationship between banks and their auditors. The banks pay their auditing firms hundreds of millions of dollars, so why SHOULD the auditors be honest in auditing the banks' books? The banks auditors have been corrupted so as to bless the bankers' accounting scams in the same way that Arthur Anderson was corrupted by Enron, giving Enron a clean audit just before Enron blew up with the most outrageously bogus accounting fraud since Charles Ponzi opened his "bank" in Boston in the early 1900s.

The third problem, says Mayo, is that the banks' Boards of Directors are generally non-financial types who don't understand the financial industry. One suspects that the boards are selected BECAUSE of their ignorance, so that the banking executives can run their scams without being questioned by competent board members who understand the business.

Although Mayo nails the problems that caused the financial collapse, his proposed solutions are nebulous. He's not in favor of more regulations, but wants the existing regulations that are already on the books to be better enforced. He wants a more competent government regulatory staff, more competent auditing firms, and more honest stock market analysts who are not afraid to cry "sell" when they suspect the banks are cooking the books. He says "Let the free market work."

I've lived through too many banking scandals to believe that any of these half-measures are going to be effective. I was in Chicago when Continental Illinois Bank failed in 1984. That was the biggest bank failure of its time, requiring the FDIC to pay billions of taxpayer money to make the depositors whole. This was the bank that originated the term "too big to fail" which we heard repeated all too often in 2008. Then there was the "S&L Crisis" of the early 1990s when hundreds of corrupt Savings and Loans failed and cost taxpayers hundreds of billions more. Then came the failures of Enron, Arthur Anderson, Worldcom, and Healthsouth in the early 2000s. Then came the failure of the entire financial industry in 2008. And now we have the M.F. Global scandal, yet another financial institution destroyed by bankers and politicians colluding to nullify and evade the banking laws!

Let's face the brutal reality: too many bankers are greedy and corrupt. They will never respect the law until they are made to feel the sting of being personally prosecuted. The Sarbanes-Oxley laws are SUPPOSED to hold corporate executives and their boards of directors PERSONALLY LIABLE for financial fraud AND for failure to implement the auditing controls that are necessary to prevent fraud. Why not enforce the Sarbox laws already on the books and let the indictments fly? Of course the answer is that the financial industry owns the White House and Congress.

IMO only one thing will convince bankers to respect the law, and that is to break their control of government. We need to be electing honest and independent-minded people to Congress and to the White House. In response to the financial crisis of 2008 there was no difference at all between the Republicans and Democrats in Congress or between President Bush and President Obama. They may disagree about everything else, but they were as united as a band of brothers in bailing out the banks with our taxpayer money and in suppressing calls for the prosecution of corrupt bankers.

I generally vote Republican, but I'd vote for ANY CANDIDATE of ANY PARTY who pledged to break the corrupting influence of the money-center banks. Let's ask Congress to reinstate the Glass Steagall Act, which prevents banks from diverting their depositors' money into toxic mortgage derivatives. Let's elect presidents who will appoint attorney generals who aren't afraid to prosecute corrupt bankers. And let's do some old fashioned trust-busting so as to fragment those "too big to fail" banks back into smaller units that can't pose a threat to the economy.

Let me add that I am not an anti-business fanatic. I earn my living as a small business person and investor in stocks, including many financial companies. I am grateful to have investment opportunities with honest lenders. I do business with regional banks in Florida and Michigan that have the highest standards of integrity and are frequently mentioned favorably in the financial press. These banks never took a penny of TARP money, never speculated in toxic derivatives, and never made a "zero interest loan" that later had to be foreclosed on. I am not at all against banks per se, just the corrupt ones.

I rate this book four stars. Mayo identifies the problem but seems reluctant to provide effective solutions to prevent a recurrence. Even so, this is a fascinating book that provides an insider's view of the details that led to the banking collapse. Perhaps we should dedicate ourselves to understanding these failings as Mayo does and then go one step further by doing what we can to break the bankers' stranglehold over our presidents and congresses. Only then, when they are held as accountable to obeying the law as any other citizens, will bankers began to operate honestly. Until that day comes we are living under the threat of another financial meltdown.

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btw. just the other day the government fined American Airlines $900,000 for holding their passengers on the tarmac for three hours. But what bank or bank executive has EVER been held accountable for destroying their businesses and the livelihoods of millions in the larger economy whose employment was wiped out in the banking collapses. Just last week MF Global wiped out another $630,000,000 of customer money and put 1,600 people out of work. Will any of their executives be held accountable? Don't bet on it. We fine the airlines because they inconvenience their passengers, but we allow bank executives to destroy the largest financial institutions in the country and undermine the entire nation's economy, and then the government rewards them with multimillion-dollar bonuses paid for by taxpayer bailout money! I guess we know who owns the government, and it is surely not the people.

Why do you do what you do? Do you do it for money? Many do. Do you do it because you love it? Some get to do that. Do you do it because you think you have the truth, and want to make it known? Few do that.

Mike Mayo seems to be one who works for the latter two reasons, and that made him unusual on Wall Street. As an analyst of bank stocks on Wall Street, Mike Mayo was not always right, but he was right more often than not. He had a strong desire to tell what he saw to be the truth, which did not win him friends amid general overleverage in the banking sector (the banks lent too much).

Wall Street does not exist to make the buyers of the securities rich, rather, Wall Street exists to help companies get financing; the large profits of Wall Street come from the creation of stocks, bonds, and other securities to institutions and individuals.

There may be a question, though: if Wall Street does not exist to enrich the buyers of securities, then why do they employ analysts who try to point out value to potential buyers? Even today, it is because Wall Street wants to make money off of the underwriting of future securities. After all there is no money to be made in the secondary trading of ordinary securities anymore.

That is why the opinions of analysts still remain roughly 65% bullish, 30% neutral, and 5% bearish. Their posture reflects the way Wall Street positions itself for those they make money from: securities issuers, not securities buyers.

And similar to rating agencies, it has to be that way, because only the securities issuer has a concentrated interest in the issuance of a security, and for bonds, the rating.

So what happens when a rare smart truth-teller, Mike Mayo, comes along, and does not care about the revenue generation potential of his opinions? He gets a good reputation from institutional investors, but often loses his job inside investment banks, because he was not profitable for them. Some clever investment bankers would use a negative opinion from Mike Mayo to sell products to fix the problems of the bank in question, but that was rare.

Book Structure

This book is part autobiography, and part a financial economics text. We learn about those who raised Mike Mayo, and those who influenced him in his career development. We also learn about the economics of Wall Street, as I have described above. But behind all of it is the nagging question, "Why do you do what you do?" In an area rife with ethical conflicts, where money goes more rapidly to those who will be cheerleaders and promoters rather than truth-tellers, asking the questions that disturb the soul are uncommon, but affected the author.

In short, the book tells of his life, and how he came to be a bank analyst. It goes through his successes, and some of his failures. It spends too much time on his correct analyses of Citi (Citigroup). It shows him learning how to be professional, and take the emotion out of issuing opinions, and reactions to opinions.

It takes us through three phases of his opinions: mixed, bullish (1994-1998), and bearish (1998+). He was willing to be bearish and lose credibility in the short run. Of course, what do we call someone who is wrong in the short run? We call them wrong, though those who are patient may still benefit.

After that, the book offers his opinions on what is wrong with finance, which he summarizes as ABC: fix the Accounting, put insolvent banks into Bankruptcy, and reduce the Clout of banks. All salutary suggestions I think.

Quibbles

Though he spent time on some of his failures, he should have spent more time there. That said, I am impressed by his determination.

Saving the big banks from themselves still seems to be an afterthought rather than a goal, despite all of his efforts.

Who would benefit from this book: Most investors would benefit from this book. It will make you skeptical of investment banks; it will teach you how Wall Street thinks. Beyond that, you might enjoy the story of someone who tweaked the nose of Wall Street, and survived (for now).

Fair and balanced in my opinion, despite the fact that the book was written by a wall street insider. The book offers a lot for both those currently on the street as well as aspirants. Mayo's experience in its entirety paints an accurate portrait of culture prevalent on the street as well as how it has evolved since the early 90's. I was quite impressed by his insights on the structural problems that still plague our financial system, even 3 years after the crisis. Forget Dodd Frank. Mayo's ABC solution does a far better job in my opinion!! A must read!!