As I write this, the crisis in Europe
rages on threatening to negate all gains in stock
markets for 2012; while seasoned traders appear to
forget the basics of finance by purchasing
government bonds in the US, Japan, Germany and
Britain at levels below the specific inflation
rates of those countries (see Bonds
lack maturity, Asia Times Online, ). There
isn't much for an observer like me to do except to
seek solace in a bunch of books, four of which I
have reviewed below for Asia Times Online readers.
Exile on Wall Street: One Analyst's
Fight to Save the Big Banks from Themselves
by Mike Mayo "The crisis didn't
occur because of something that banks did. No, it
was the natural consequence of the way banks are,
even today." That little sentence in the middle of
Mr Mayo's introduction to the book is perhaps the
clearest statement of
intent that one can expect
from any author who sets out to write a book on a
subject that he knows better than the back of his
own hand.
Mike Mayo doesn't need an
introduction to most "sophisticated" investors in
the equity markets, far less anyone who has been a
fund manager responsible for managing a portfolio
of US banking stocks. He is perhaps one of the
most distinguished equity analysts in financial
market history; a person with one eye on market
strategies and the other on bankers' integrity.
In a funny way, Mayo is also a victim:
specifically of Michael Lewis (also reviewed
below) who short-changed him famously in The
Big Short by heaping accolades on the equity
analyst Meredith Whitney for her brilliant call on
Citigroup while largely ignoring Mayo, who had
made the same call, only earlier (ie before
Whitney) and with more market impact. Going
through the rest of his history and other calls of
stumbling US financial institutions - the former
Bank One, Keycorp and so on, it is indeed
difficult to fault the predictions of Mayo.
As one goes through the book, it becomes
clear that Mayo was a rank outsider who worked
diligently and steadily to move up the corporate
ladder on Wall Street; an exception that isn't
immediately obvious to anyone who isn't deeply
familiar with the industry and its recruiting
practices that focus on Ivy League schools and
family connections. After being rejected for many
a job, Mayo describes going to work for the
Federal Reserve.
Perhaps he should have
spent a bit more time examining the intricacies of
the Fed bureaucracy and the lack of capabilities
amongst its staffers (barring a few) but Mayo then
moves on to Wall Street where his career takes him
through UBS, Lehman, Prudential Bache and Deutsche
Bank (in the book; I understand that Mayo then
went to work for Credit Agricole in the US but he
doesn't mention that in the book for
understandable reasons). Using arcane financial
models initially but then moving closer to the
"story", ie the actual care and diligence of the
banks amidst a stunning growth in their asset
bases, Mayo starts outlining the structural
failings of the banks.
He could have added
that the pressure to perform on quarterly earnings
was another big factor in banks focusing
excessively on the short-term; essentially
sacrificing their long-term viability at the altar
of analyst expectations but he misses that
particular angle (perhaps on purpose, seeing where
he has been located for much of his career).
Other than that, I found his take on
banks' management style refreshingly candid to the
point where a number of CEOs evolve from their
PR-burnished cardboard images (Jamie Dimon for
example) to something altogether more human and
likable. Even his bete noire in the book, Vikram
Pandit of Citigroup, comes across not so much as a
schoolyard bully but as someone who is
fundamentally decent albeit with an
over-protective or controlling inner circle.
A side note for Asian investors and
readers: the context of Mayo complaining about
access to banks' management would be thoroughly
unfamiliar in a region where companies and banks
are managed as personal fiefdoms and only lip
service ever given to corporate disclosure and
transparency. Reading through the publication I
couldn't help but feel that Asians would be happy
to have the kind of problems that Mayo has
outlined in his book.
Mayo describes in
detail the conflicts at the heart of investment
analysis wherein the needs of profitable bankers
to effect deals (equity calls, rights issues, bond
buybacks) exceeds the more sedate
commission-driven world of turnover that is
dictated by the accuracy and strength of analyst
recommendations.
Perhaps he could have
actually explained the differences through a
financial model in his book; but what does come
through is the conviction of how good analysts are
easily waylaid by their own franchises for a quick
buck and anyone who doesn't play along is punished
and cast out.
His long-running feuds with
the likes of Citigroup and JPMorgan aside, Mayo
comes across as a decent person with terrific
insights into the now hopelessly arcane world of
the big banks. Towards the end of the book, he
relates how his wife, a doctor, keeps him grounded
by telling him to "now take out the trash"
whenever he comes back home gloating about his
work achievements.
Reading that bit though
made me think: from the perspective of a decent
chunk of people exposed to the world of finance
directly or indirectly, the need of the hour is to
have leaders in place who are capable of standing
up to the big banks and pushing through strong
improvements in transparency and risk management.
Whether it is the Fed, the European
Central Bank, the Bank of England or the Bank of
Japan or indeed the International Monetary
Fund/Bank of International Settlements and other
truly global organizations involved in high
finance; Mayo may well be the most suitable person
to stare down the CEOs of the world's top 100
banks.
I say give Mayo the chance to
actually supervise the top 100 banks in the world.
The results may prove a fitting epilogue to his
book when updated a few years from now.
Bailout Nation (with
post-crisis update), by Barry Ritholtz and
Aaron Task To be fair, Bailout
Nation deserved better than to be reviewed a
full two years after its publication. I did start
reading it, but coming across more compelling
works at the time dropped the book for a later
date; little was I to know that the "later" would
be two years. Perhaps because of that intervening
period that has been rich in both explaining the
effects of the financial crisis and the role
played by various agencies in effectuating this
result, the review is also perhaps more critical
than it may have been if I had written it when the
book was first published.
A compendium of
tales that strings together the ever-increasing
trend towards the socialization of losses in the
United States, the book starts well with
pre-bailout history of the US, the effects of
launching the Federal Reserve (Fed) and the slow
trend towards governments getting more involved in
business with the attendant moral hazard.
Specifically, I loved the "intermezzo"
between the various chapters as well as the
tongue-in-cheek guide to funding the unfundable
such as national healthcare (clue: launch a hedge
fund). These ready reckoners are well worth the
price of the book.
Where the book fails is
in layout that reminds one of a hyperactive sports
reality program on television where the televised
action is all-too-often interrupted by the cameras
panning back to the commentators for their expert
views. That layout or book structure is in my
opinion unsuitable for any serious book on the
financial crisis, particularly because the books
were written in the aftermath of the crisis rather
than as a predictive fable written before the
crisis.
Dude, we know how it all ended:
what we wanted to read was how the machinery got
jammed.
The corollary criticism of the
book - like some of the others here - is that the
authors are so obviously skimping on details or
thorough analysis. Now, I have been in front of
book editors and am well aware that they like to
use a "name" (like Ritholtz) to sell the
merchandise but also advise alongside that the
material is kept simple enough that the casual
airport browser would want to pick it up and also
recommend it to their friends.
If Ritholtz
did get such advice in writing his book, he would
have been better off ignoring it completely; for
the result in Bailout Nation is tantalizing
glimpses of what the author knows (or knew
beforehand) albeit without sufficient details to
get readers focused on the key points.
An
example is the chapter entitled "Tech Wreck",
wherein the authors examine the causes for the
tech bubble. Writing some 10 years after the fact,
Ritholtz would have had ample time for detailed
analysis - which he doesn't present. For example,
he makes the statement that the "Y2K" bug
increased tech spending by companies and banks,
and led to a sharp drop in orders immediately
thereafter; in effect bursting the dot-com bubble.
This is a point that has been repeatedly
made by a number of people and the only way for
Ritholtz to stand out would have been to show the
actual trends: a break up firstly of total capital
expenditure as a percentage of corporate revenues
(clue: they rose massively in the second half of
the 1990s), broken down between tech and non-tech
(clue: tech spending was significant) and within
tech, between normal upgrades, online expansion
and Y2K.
It is in the analysis of tech
spending that the actual story of the dot-com
bubble is to be found, but since Ritholtz misses
the opportunity to explain the point, he misses
the opportunity to stand outside the crowd.
Another such example is in the chapter on Bear
Stearns, wherein the author makes a number of
sweeping points in terms of comparisons with other
situations such as the collapse of Lehman Brothers
and AIG, but fails to complete the analysis by
explaining exactly what those differences were.
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In a funny way, Mayo is also a victim:
specifically of Michael Lewis (also reviewed
below) who short-changed him famously in The
Big Short by heaping accolades on the equity
analyst Meredith Whitney for her brilliant call on
Citigroup while largely ignoring Mayo, who had
made the same call, only earlier (ie before
Whitney) and with more market impact. Going
through the rest of his history and other calls of
stumbling US financial institutions - the former
Bank One, Keycorp and so on, it is indeed
difficult to fault the predictions of Mayo.
