Exile on Wall Street is an easy reading introduction to the world of the (sell side) Wall Street analyst over the past twenty years, both for those starting out (or wanting to) in the business and for readers interested in a valuable `how the world really works' addition to their investment reading. I would not recommend it for industry professionals who are already all too familiar with the issues and challenges at hand.
As a risk manager and analyst who has been evaluating financial institutions for twenty years, I found the book a welcome addition to a wide body of work, from Liar's Poker and Barbarians at the Gates to The Big Short. On the other hand, I was hoping for a wider range of anecdotes and incidents supporting Mike's underlying thesis: how difficult their employer makes it for a sell side analyst to be professional and objective in evaluating a company for investors, especially where bad news is concerned. In particular the underlying revenue driven reasons why and the complexity and contradictions of the business model. As an internal cop who rarely had to bother with placating the management of companies I was analyzing my approach is more reflective of Steve Eisman's adage: Always assume they are lying to you.
Perhaps because of his early experience he describes working at the Fed, Mike has what I view as an overly evolved regard for regulators and the Fed. In particular, like a previous reviewer I would remind Mike that the Too Big To Fail doctrine was first established by the bailout of Continental Illinois in 1984, with the approval of then chairman Paul Volcker, a man some of us refer to as the General Grant of central bankers. It's not meant as a compliment. As the partner who had to face an electorate, Reagan both supported Volcker in public and took the brunt of the fallout from the brutal recession that resulted from the `death to inflation at all costs' policy at the Fed. The regulators historical track record going back forty years plus is more tarnished than he implies, though there were heroes like the late Bill Seidman and the heroic and currently besieged Ed DeMarco who prove his point.
Throughout the book he seems to evince a touching naivety in the rectitude and capabilities of both regulations and regulators that I find perplexing. Based on the evidence that he alone presents, Mike should know that Sarbanes-Oxley was a waste of time and effort. If he had ever visited the unglamorous bowels of a bank or broker, he might have more sympathy for the thousands of people in IT, Operations, Audit, Compliance, Risk and other functions who waste week upon week meeting the mind numbing paperwork requirements for these laws when they could be doing their jobs. And to what end? MF Global. And Dodd Frank is likely to prove far worse. Because Mike is basically what is referred to as `Front Office,' I don't necessarily fault him for this omission.
Mike points out rightly that not a single executive who ran one of these banks into the ground has gone to jail, and that most of the culprits who failed the country and investor community are either still in place or have moved up the food chain. Along with the `titans of industry' I would suggest another Exhibit A: Tim Geithner. Meanwhile, the SEC was handed Madoff and Sanford on a platter, and did nothing.
The author is another in a long line of those who lament the role of the repeal of Glass-Steagall as an enabler in the crisis. We have yet to see a single major example of exactly how the repeal of Glass-Steagall led to the failure of a financial institution, either on the IB side (Bear, Lehman, Merrill) or commercial bank side (WaMu, Countrywide, IndyMac, Wachovia, Nat City). Despite the lack of empirical evidence, this baseless canard continues to pollute the debate over how to fix a broken TBTF system.
And by the way, the only result of the so-called Volcker rule will be to produce entities such as, oh say, Long Term Capital Management (r.i.p. 1998), the TBTF hedge fund that last took us to the edge of the cliff. And Glass-Steagall prevented this how?
But these are matters about which respectable analysts will differ based on their experiences. Nevertheless I have tremendous respect for Mike for pointing out one of the key, if not major flaw in Wall Street research that still haunts us twelve years after the research settlement: the lack of objective research and the willingness to apply a sell rating or call a dog a dog. But the author is also honest enough to acknowledge those cases where he dropped the ball, as in the case of Lehman. In his defense, who didn't?
The uninitiated will find a few valuable insights here as to how the world works and how deals get done, not just in the financial services industry. I cannot overemphasize the importance of this lesson for new entrants into the business and potential investors and suggest more advanced reading. Another sad but tragic truth about getting into the business is described early on as we read about Mike's epic struggle to get hired by an elitist culture that is all too willing to hand the job to the person with the right school credentials, rather than the fundamental, technical and ethical chops to do the job as it should be done.
Mike touches on several intractable problems best summed up under the rubric of conflict of interest. If sell side analysts, auditors and rating agencies all operate under some kind of conflict of interest in that they are paid by the very executives who they are evaluating, that calls into question the very infrastructure upon which efficient markets and investors depend for decision making. And the author rightly identifies it as a major impediment to a cleansing and repair of the system. In contrast to other reviewers, I wish to emphasize that there is a difference between conflict of interest and corruption. Buyer beware.
Exile is largely focused on the financial analysis and Machiavellian workings of the I-banks and big banks themselves. For a fuller and more complete understanding of the roots and evolution of the housing crisis itself and how it infected the financial system, the reader should pick up Gretchen Morgenson and Joshua Rosner's superb Reckless Endangerment. (In addition, they name the guilty - in detail.) Then go read The Big Short, by Lewis.
Frankly, his two chapters covering Citi alone are a pretty good read, covering not only the past few years but offering a short survey of the company's history as `the Zelig of financial recklessness.' Priceless (sorry, I disagree with a previous reviewer on this subject. Examples are always useful to prove a more general point, and there is no finer example than Citi.). It surprised even me to read that in 2008, a year in which one of the `leading financial institutions in the world' was cited not once but twice by two separate regulators for having inadequate risk management systems, saw its net worth go to zero, and was on its way to implosion and repossession by the taxpayers yet again, the CEO was paid $38 million.
Indeed here the author seems to second my own view regarding useless regulations when he writes: "If Sarbanes Oxley does not apply here, then it's not clear when it would apply, or what the hundreds of millions of dollars spent on compliance efforts by Citi and other public companies is actually supposed to accomplish." Bingo.
Near the end, the author offers some very basic suggestions to policy makers that could go some way toward improving the transparency and accuracy of the financial information analysts and investors could use to better evaluate the industry. Frankly, I think some of them ring a bit naïve and simplistic even based on the evidence he alone has just offered, but we have to start somewhere. Even better, he also nominates a bank that shines a light on how to do it right: M&T in Buffalo. Anybody in Washington listening?
I have little doubt that, had he been retired instead of still working on the street, Mike would have pulled the trigger for the other barrel and produced a fuller book. I look forward to it when the day comes. Mike Mayo is a superior financial analyst who has produced a readable and valuable contribution to what seems like our never ending debate over the Gordian Knot of Wall Street reform. As this week's news about the recent IPO Groupon suggests, there is still so much more of his work left to do.
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A M.
Boring. Didn't even finish it
Reviewed in the United Kingdom 🇬🇧 on June 3, 2015
