I’ve heard Mike Mayo’s name often the past 10-15 years, but frankly since he was covering the banking industry, it was of little concern to someone focused on more ‘growthy’ areas of the market. That said, I knew he was controversial because he was a ‘truthy’ type of guy, in an industry where truthy is not so cool. Then last week he was on CNBC as a guest host for an hour or two and I was very impressed with the guy. He has a new book out and hence is doing the publicity tours – below we have pieces from an excerpt he has in the Wall Street Journal. This is good information for those of you newer to the markets and who rely on analysts – I wrote a piece almost 4 years ago (sheesh have I been around that long?) on the FMMF site highlighting how rare a ‘sell’ rating is by the analyst community.
One must always remember what the motives are for analysts, and where they are in the food chain of a bank. There was a big fuss after the late 90s and all these “new proposals” were put into place to make the analyst community change to a more useful service instead of beholden to other interests within a bank. Everyone asked why is there almost never a “sell” rating?? As with all things regulatory in this country – this fuss was raised, fines (minor ones) were levied, we were told everything was fixed, and everything went back to business as usual within 2 years. I just have to laugh when I see all these sells NOW showing up for the financials… it would be amusing if the reasoning behind it were not so pathetic. Read on to learn about “business as usual”
Newer investors should know why that is, and Mayo provides first hand experience of the treatment an analyst receives when he dares to put out an honest opinion that might hurt the relationship his employer has with said corporation.
Over the past 12 years, longtime banking analyst Mike Mayo has issued numerous calls to sell bank stocks, a rarity in a system where nearly all stocks are rated buy or hold. His negative ratings have frequently gotten him in trouble with banks, clients and his own bosses, who didn’t want to alienate those companies. In this excerpt from his new book, “Exile on Wall Street,” Mr. Mayo gives an inside view of the fights, the scolding and the threatening phone calls he received as a result of yelling “sell”.
Taking a negative position doesn’t win you many friends in the banking sector. I’ve worked as a bank analyst for the past 20 years, where my job is to study publicly traded financial firms and decide which ones would make the best investments. This research goes out to institutional investors: mutual fund companies, university endowments, public-employee retirement funds, hedge funds, and other organizations with large amounts of money. But for about the past decade, especially the past five years or so, most big banks haven’t been good investments. In fact, they’ve been terrible investments, down 50%, 60%, 70% or more.
Analysts are supposed to be a check on the financial system—people who can wade through a company’s financials and tell investors what’s really going on. There are about 5,000 so-called sell-side analysts, about 5% of whom track the financial sector, serving as watchdogs over U.S. companies with combined market value of more than $15 trillion.
Unfortunately, some are little more than cheerleaders—afraid of rocking the boat at their firms, afraid of alienating the companies they cover and drawing the wrath of their superiors. The proportion of sell ratings on Wall Street remains under 5%, even today, despite the fact that any first-year MBA student can tell you that 95% of the stocks cannot be winners.
Over the years, I have pointed out certain problems in the banking sector—things like excessive risk, outsized compensation for bankers, more aggressive lending—and as a result been yelled at, conspicuously ignored, threatened with legal action and mocked by banking executives, all with the intent of persuading me to soften my stance.
Looking inside the world of finance—with its pressures to conform and stay quiet—may offer some insight into why so many others have fudged. And it may offer some answers as to how crisis after crisis has hit the economy over the past decade, taking the markets by surprise, despite what should have been plentiful warning signs.
Mayo goes on to explain specific situations and the fallout that happened when he went negative (i.e. dared to say sell) – while not surprising, it is still sickening to see ‘inside baseball’.
Trader Mark is the author of Fund My Mutual Fund.