Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves by Mike Mayo is one of the more important books to be published since the start of the financial crisis. Part memoir, part revelatory narrative of Mike’s career, this highly personal but informative book provides some very important information about how Wall Street works – or doesn’t – and confirms the view of many people than most deals are bad deals, done only to enrich the parties but not investors.
By way of disclosure, I need to say that Mike and I both worked at Prudential Securities in the early 2000s, he as an analyst and myself as a tech banker, so we never really got to know each other. It may interest readers of The Big Picture to know that I have just joined Tangent Capital Partners in New York. I will be focusing on financial advisory and asset management opportunities, but remain Vice Chairman of Lord, Whalen LLC, parent of Institutional Risk Analytics. Maybe I’ll get to serve as receiver for Bank of America when they go belly up, but I digress.
A decade before Prudential, Mike and I almost crossed paths at the Fed, but he worked at the Board of Governors in Washington while I was at the Fed of New York. The former is supposedly in charge of the central bank’s operations, but the latter is the older and more important part of the Fed system. When Treasury Secretary Timothy Geithner was President of the New York Fed, he dispensed gifts and subsidies to Goldman Sachs and other banks without the prior knowledge or objection of Chairman Ben Bernanke and the other members of the Fed Board of Governors. Suffice to say that there are no tennis courts at the New York Fed.
Mayo provides a lot of important detail about how the major Wall Street firms operate and, in particular, why the larger banks and their clients are more concerned about making money than creating value. Mike learned as did I that truth is not beauty on Wall Street, except in those few, generally smaller firms that have been able to preserve a culture of client service and quality. As Mike points out several times in Exile, many large cap mergers are done simply to cash out the managers.
“Two things are worth noting about these super-size banks,” Mayo writes. “First, much of their growth has come from mergers and acquisitions. They are not growing like Google, by creating a product and doing it better than anyone else. Instead they are just buying out their competitors… Secondly, many of these banks would likely not have grown to their current size without federal assistance in the past. In all the bank crises of previous decades, bank failures were thought to be too economically disruptive. But government bailouts – including the most recent round – didn’t resolve that problem. They merely delayed it, allowing banks to keep growing in size and scope, making the potential cataclysm next time that much bigger.”
This quote hints at one of my criticisms of Exile on Wall Street, namely that Mike does not yet appreciate that nobody in Washington or on Wall Street wants banks, especially the largest banks, to behave. There are many places in the book where I expected Mike to turn that corner of epiphany and state this case, but let me do it for him.
Whether you talk of the National Bank Act of 1865, the creation of the Fed in 1913 or the subsequent birthing of the housing GSEs in the 1930s, both the business community and their lackeys in Washington were more concerned about stoking employment and sales today than in safety and soundness of money or banks. I touched on this point in my 2010 book, Inflated: How Money and Debt Built the American Dream, which begins with this quote from Hayek’s “Denationalization of Money” essay:
“I do not think it is an exaggeration to say that it is wholly impossible for a central bank subject to political control, or even exposed to serious political pressure, to regulate the quantity of money in a way conducive to a smoothly functioning market order. A good money, like good law, must operate without regard to the effect that decisions of the issuer will have on known groups or individuals. A benevolent dictator might conceivably disregard these effects; no democratic government dependent on a number of special interests can possibly do so.”
If you look at the decision to allow national banks to make real estate loans three quarters of a century ago or the S&L crisis in the 1980s, the point was jobs, jobs, jobs. This is why the socialists in the neo-Keynesian economic camp led by Paul Krugman chatter constantly about printing more money to grow nominal employment, even if these “workers” cannot afford to buy food at the grocery story due to galloping inflation.
The other, related point to make about Mayo’s memoir is his somewhat embarrassing paean to Paul Volcker. Like Mike, I have great personal regard for Chairman Volcker as a public citizen, but we cannot allow the author of a book about the bad behavior of large banks to get away with this omission. Simply stated, Paul Volcker is the father of “too big to fail.” A former Chase banker, Paul Volcker has always been an advocate of bailouts going back to the Penn Square Bank failure. As I wrote in Inflated:
“In his 2010 book Senseless Panic: How Washington Failed America, former FDIC Chairman William Issac confirms that Mike Bradfield, then general counsel of the Fed and now in the same position at the FDIC, demanded that the FDIC bail out Penn Square Bank, no doubt with the knowledge of Volker and other Fed governors. Issac responded that he would if the central bank shared the cost, but the Fed balked.”
Overall, Mike Mayo deserves great kudos for writing this readable and very personal narrative of his years on Wall Street. Like Mike, I have spent a lot of my career fighting the tendency of big banks and politicians alike to paper over the truth in the name of expediency. Exile on Main Street is a valuable, firsthand account of why in our democracy big banks and the people who run then tend to be less concerned about creating value for investors than in extracting value for themselves. And as long as America remains a messy, ill-managed free market system, it is likely to remain so.
The CNN Washington Bureau’s morning speed read of the top stories making news from around the country and the world. Click on the headlines for more.
WASHINGTON/POLITICAL:
CNN: House Republicans scrap direct vote on Senate payroll tax plan
Republicans on the House rules committee have voted to prevent a direct vote Tuesday on a Senate plan favored by Democrats and Senate Republicans to extend the payroll tax cut for two months.
CNN: House to vote Tuesday on Senate payroll tax plan
House Republican leaders put off until Tuesday a vote on a Senate plan to extend the payroll tax cut and said they were willing to work until the end of the year to negotiate a compromise with Senate Democrats.
CNN Money: Congress = Uncertainty Inc.
House Republicans say the two-month payroll tax cut extension passed overwhelmingly by the Senate would inject uncertainty into the economy.
CNN: CNN Poll: Gingrich lead gone, dead even with Romney
Newt Gingrich's lead in the race for the GOP presidential nomination has evaporated, according to a new national survey.
NATIONAL:
CNN: Hearing continues in Wikileaks court martial case
The military court hearing for Pfc. Bradley Manning continues Tuesday, a day after witnesses gave explosive testimony about the Army private accused of leaking more than a quarter of a million classified documents to the WikiLeaks website.
CNN: Blizzard pounds West, Midwest
Interstates and highways were shut down Monday night as a large winter weather system brought heavy snow, fierce winds and ice to at least five states in the West and Midwest.
CNN: Justice Department says a Conn. police department targeted Latinos
In a scathing report, the U.S. Department of Justice on Monday accused the East Haven Police Department (EHPD) in Connecticut of engaging in a pattern of widespread discrimination against Latinos in violation of the Constitution and federal law.
CNN: Two Muslim religious leaders sue airlines for discrimination
Two Islamic religious leaders from Tennessee filed a lawsuit against two airlines Monday, claiming they were discriminated against and not allowed to fly on a plane in May because of the way they looked.
INTERNATIONAL:
CNN: North Korea: Should we fear change?
North Korea's government was famously accused in 2002 by U.S. President George W. Bush of helping terrorism and seeking weapons of mass destruction, along with fellow "axis of evil" countries, Iran and Iraq.
CNN: U.S. supports plan to relocate terror group
The Obama administration "welcomes" a United Nations-led effort in Iraq to relocate a group on the State Department terrorism list, before an end-of-the-year deadline that could see heavy violence and a large humanitarian disaster unfold, senior administration officials said Monday.
CNN: Arrest warrant issued for Iraqi vice president
An Iraqi investigative committee issued an arrest warrant Monday for the country's vice president, who is accused of orchestrating bombing attacks against government and security officials.
CNN: Protesters battle for control of Egypt's Tahrir Square
Police and military troops clashed Monday with protesters in Egypt's Tahrir Square, the symbolic center of the uprising that brought down President Hosni Mubarak earlier this year.
BUSINESS:
CNN Money: What's really behind Twitter's staff exodus
Twitter's transformation from startup to power player has hit its rocky adolescent stage. In the past six months, more than a dozen high-level employees have departed. The sudden exodus set Silicon Valley chattering: What's going on at Twitter?
CNN Money: AT&T kills $39 billion bid for T-Mobile
Facing heavy resistance from the U.S. government to its $39 billion bid for T-Mobile, AT&T on Monday officially killed off the deal that would have created by far the nation's largest wireless company.
CNN Money: Stocks sell off as banks tank
U.S. stocks closed sharply lower Monday as bank shares took a beating amid fresh concerns about the debt crisis in Europe.
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Henry Kissinger does not view North Korea as a major threat when it comes to sustaining a full-scale long term war.
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