Wall Street Whiff

Heaven help us all. Mike Mayo has written a book.

Mayo is of course the banking analyst, currently at CLSA, who’s somehow gotten a reputation for tough-mindedness in recent years, largely on the basis, from what I can tell, of his habit of asking obnoxious questions to bank managements and then whining about the answers he gets back. (Or sometimes doesn’t get back. Mayo set a new mark for sell-side absurdity last month when he put out a note lambasting Bank of America for not having the guts to take a question from him on its third-quarter conference call-then had to issue a retraction soon after when it turned out he’d mistakenly dialed in on the listen-only telephone number.)

I’ve known Mike Mayo since the days we were competitors on the sell-side. He even interviewed with me once for a spot as a junior analyst. And, to be fair, we have a few things in common. As bank analysts, neither of us is reluctant to publicly criticize managements when we feel it’s appropriate; we’ve both been denied access to senior management at certain companies as a result. Firms we’ve worked for have lost investment banking business and trading commissions because of our criticism. We’ve both been fired for not whoring our research for the sake of the bankers.

But just because (as my ex-wife used to tell me in a slightly different context) you’re a contrary-minded loudmouth doesn’t mean you’re particularly competent. When I was on the sell-side and heard some of the questions Mayo used to ask at conferences and on earnings calls, I got the impression that his work was perhaps slightly above average, but not much better than that, and that his grasp of the banking business could be shaky. When I moved to the buy-side and began reading his work more often, that suspicion was confirmed. (Since he moved to CLSA, I haven’t read a single report of his.)

And now that I’ve read the new Mayo opus (Exile on Wall Street. Catchy!) I have new insights into the Mayo character. Based on what he has to say in his book, Mike Mayo isn’t merely average. He’s also sanctimonious, delusional, and arrogant. But don’t take my word for it! Read the book for yourself! Actually, don’t read it. It is an incredible waste of time, ink, and paper. Instead, allow me to highlight just a few of the inanities Mayo shares with his readers:

1. Mayo claims he called the financial meltdown-back in 1999! Mike, if you think a 1,000-page report you wrote back in 1999, in which you recommended sale of bank stocks across the board, counts as an early prediction of the Panic of 2007-2008, you’re kidding yourself. For one thing, the bad loans that caused the panic weren’t even written for another six years! In 1999, the conditions that brought about the crunch hadn’t even begun to fall in place.

What’s more, in the fullness of time we now know that Mayo’s negative call on the banks in 1999 turned out to be incredibly wrong. Some numbers: between the time Mike published his bearish piece and the group’s subsequent bottom in late 2002, the BKX bank index fell by 32%. Over that same period, however, the market overall, as measured by the S&P 500, declined 42%. So for the relative-performance-minded mega-institutional equities manager (who pay the vast chunk of research-driven commissions, by the way), Mayo’s call was 100% unhelpful.

What’s more, the BKX then proceeded to double from 2002 through year-end 2006 and outperform the S&P 500 in the process, all while Mike Mayo maintained his negative view of the group. So over the entire seven-year period, the BKX rose by 33% and outperformed the market. And Mike missed all of it.

It’s of course true that bank stocks headed south in 2007 and then collapsed in 2008. But, again, the cause of the collapse had nothing to do with what Mike Mayo wrote about in 1999.

2. Plenty of fact-free claims. Mayo throws around some pretty wild assertions and then backs them up with basically nothing. He says, for example, that without the TARP program, 12 of the 13 largest U.S. banks would have failed. What facts or data does he offer to support such an extravagant claim? None. Actually, Mayo’s assertion isn’t just extravagant. It’s also ridiculous. If 12 of the country’s 13 biggest banks failed, guess what? The 13th would have failed, too–along with thousands of others. Mayo is merely being reckless.

Or how about when he claims (again, with no support) that his reputation became so fearsome that a few negative comments from him could cost a CEO his job? He even seems to think that some tough-sounding questions he asked on a Citigroup conference call led to Chuck Prince’s ouster in 2007 and Stan O’Neill’s departure from Merrill. Can he really believe that? Does anyone remember it that way? In fact, it’s my belief that Prince got the axe because Citi imploded under his leadership. The company later needed multiple bailouts. I suspect that Citi’s performance had more to do with Prince’s departure than a few snotty questions from Mike Mayo did.

It never ends. Somewhere else in his nutty book, Mayo claims KeyCorp reported a negative loan loss provision in order to artificially boost earning and, by extension, fatten executive compensation. Oh, please. Mike’s grasp of reserve accounting, like that of many on the sell-side, has never been strong. (I’ll spare you the details of all the places he goes wrong.) Suffice it to say that according to accounting rules, management has incredibly limited latitude in setting loss reserves. That he accuses KeyCorp of cooking its books is a slander. And, frankly, I never heard Mayo say in 2008 and 2009 that KeyCorp or any other bank was deliberately over-reserving in order that management could keep its compensation down. .

Mayo claims Capital One misled investors by issuing just a preliminary earnings release this past July before it completed a secondary equity offering. That’s nonsense. Later in the month, the company issued its full earnings report. Given the timing of the equity offering and the normal earnings calendar, the company did the right thing both legally and ethically by disclosing what it could, even before all the details were available. The fact that Mayo found one number in the later, detailed release that he didn’t like doesn’t mean the company was intentionally misleading investors. It wasn’t. Again, to say otherwise is a slander.

Finally-and this is the part that really got my goat!-Mayo writes that he “was only the second person in decades to be so highly ranked in both of Institutional Investor’s bank categories [i.e., money center and regional].” Wrong again! Both Tom Hanley and I had top rankings in both categories, for years. For all I know, there were others, too.

3. Mayo’s calls for industry change are underwhelming. For a self-styled contrary-minded truth-teller, Mayo shows an astonishing lack of imagination in coming up with suggested reforms for a system he’s spent a career complaining about. Rather, his prescription is “A, B, C,” for accounting, bankruptcy and clout. I am not impressed. With respect to accounting, for example, Mayo provides very few specifics, except he wants more disclosure, wants auditors changed every 10 years, and wants the lead partner on the audit to sign his name. Seriously. That would have prevented the crackup? Really?

He also wants all companies to be able to fail rather than be too big to fail. Well, sure, don’t we all? But that’s easier said than done, if for no other reason that no one can predict the circumstances of the next crisis. No one today thinks Wal-Mart or Apple will ever need a bailout. Fifty years ago, no one imagined General Motors ever would. No one can foresee the future; it’s hard to imagine the unimaginable. In the meantime, platitudes from Mike Mayo don’t help.

Finally by “clout” Mayo means he thinks bank boards of directors, equity analysts, and regulators should do their jobs better. Great, Mike! That’s like having “hope” as a strategy.

Perhaps most telling about Mayo and this book he’s come up with is that, despite his supposed fearless pugnacity, he doesn’t name many names! So while he might gripe that, say, this research director was a party animal or that that banking analyst was an incompetent hack, he doesn’t come out and actually say who the animal or the hack is! The omission is puzzling. It’s not as if he doesn’t provide enough context and detail elsewhere that a determined reader can’t go out and figure out who these people are. (I recognized Susan Roth, Katherine Hensel, and Judah Kraushaar, for example, without even having to resort to the Internet.) Come on Mike, give us the dish! That he doesn’t have the nerve to mention these folks by name says a lot about how sturdy Mayo’s purported gutsiness and independent-mindedness really is. And it provides a useful context for judging the rest of the book’s credibility.

There’s a lot more in Mayo’s book that I disagree with, but I’ll stop here. You get the picture. Clearly, I disagree with him on much of the content, and I am amazingly disappointed in his obnoxious, egotistical tone. Mike, you’re just not that good.

What do you think? Let me know!