By JLP | November 15, 2011
I received a copy of Mike Mayo’s Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves* a week and a half ago. As the title suggests, the book is about his experience as a securities analyst covering banks.
First things first. Who is Mike Mayo? According to the inside flap of the book, he’s “…one of the top-ranked banking and finance analysts of the past twenty years. Mayo was the only analyst to testify during the Senate Banking Committee hearings in 2002 on conflicts of interest on Wall Street, and in 2010, he testified again, this time as the first analyst to speak on the causes of the crisis.”
My thoughts on the book
Overall, I liked the book very much. It was an easy read and gave a nice overview of what happened in the years leading up to and following the housing crisis. Along the way, the author discussed the problems he had trying to be an honest analyst. When he was critical of banks, they shut him out and wouldn’t give him access to their management. He was even fired for his honesty. I applaud his efforts to put investors first.
Reading the book, it’s very clear that Wall Street is a racket. It’s heavily loaded in favor of the bankers and investors are only important because they provide money. Something needs to be changed.
I enjoyed the personal aspects of the book like when he shared about his struggles to land his first banking job. He ended up working at the Fed in the merger-approval area after working briefly at IBM. He spent five years at the Fed and eventually landed a job at UBS. Mayo’s honesty in his reports didn’t do him any favors with his employers. At one point he was fired from his job a Credit Suisse and spent six months unemployed.
When it came to his discussion of the causes of the housing debacle, I felt he was too easy on the politicians and their role in helping create the crisis. The lack of detail here could be because he was writing about the crisis from his perspective. Whatever the case, he left the impression that politicians (both Democrats and Republicans) played a minor role in the creation of the crisis.
The best part of the book was his discussion on fixing capitalism. From the book:
To fix the banking sector, should we rely more on government regulation and oversight or let the market figure it out? Tougher rules or more capitalism? Right now, we have the worst of both worlds. We have a purportedly capitalistic system with a lot of rules that are not strictly enforced, and when things go wrong, the government steps in to protect banks from the market consequences of their own worst decisions. To me, that’s not capitalism.
I can understand the appeal of certain regulation. If we’d had the right oversight in place, we would have limited the degree of the financial crisis, which included bailouts measured in hundreds of billions of dollars, and millions of people losing their homes due to foreclosures. But we also would have sacrificed innovations in credit and a vibrant financial sector. Over the past century, our economy probably would not have grown as fast or been anywhere near as dynamic. Moreover, the real problem with regulation is that it often doesn’t work very well, in part because it’s always considering problems in the rearview mirror. The financial system today is almost dizzyingly complex and moving at light speed, and new rules tend to address fairly precise things. They ban specific types of securities or deals or trades instead of addressing larger principles.
He goes on…
A related issue is that regulation can sometimes trigger unintended consequences. Another section of Dodd-Frank cut the fees that a bank can charge a store for debit card transactions. As you can imagine, banks are not about to simply shrug that off. It adds up to billions each year. Instead, they’ll make it up somewhere else—most likely by charging consumers for other services, as in no more free checking. The bottom line? Consumers will now pay more for the convenience of using a debit card, and will likely never see the benefits from the lower costs to merchants. This is—let’s face it—price-fixing by the government, and it shows why measures like this don’t really help things in the long run. If the government were to set a cap on how much McDonald’s could charge for Big Macs, it wouldn’t take long before the price of fries went up to cover the difference.
I agree. Unfortunately, our politicians don’t seem to be listening.
Overall, Exile on Wall Street* is a great read. It’s easy to understand and not at all mundane. I highly recommend it to anyone who’s interested in learning more about the housing crisis and the interworkings of the banking industry.
Now you have a chance to win a copy of the book from AllFinancialMatters. If you’re interested, please leave a comment below. I’ll randomly select and announce a winner on Friday. Before you enter, please consider my two rules:
1. You must be a resident of North America (I will not ship internationally).
2. You can only enter one time.