Chapter 1
Wall Street's Uncomfortable Truth-Teller
Mike Mayo isn't your typical Wall Street analyst. In a world where most financial professionals avoid rocking the boat, Mayo has built his career on challenging the status quo, often at great personal cost. His book "Exile on Wall Street" provides a rare insider's perspective on the banking industry's deepest flaws from someone who has repeatedly risked his career to speak truth to power. Since its publication, Mayo has become something of a cult figure in financial circles, with Warren Buffett praising his independence and The Economist calling him "one of the few analysts who dares to say emperor has no clothes." What makes Mayo's story particularly compelling is how his immigrant family background and outsider status shaped his willingness to challenge powerful institutions, even when it meant professional exile. His journey reveals not just the mechanics of banking crises, but the human dynamics that allow them to keep happening despite catastrophic consequences.
Chapter 2
From Federal Reserve Boot Camp to Wall Street Battles
My career began not at a prestigious Wall Street firm but at the Federal Reserve, where I received what amounted to Marine Corps boot camp for bank regulators. After facing constant rejection from Wall Street firms (I still keep those letters), I took a pay cut to join the Fed, where my banking philosophy took shape under Paul Volcker's lingering influence. At the Fed, we learned to question exceptionally rapid growth in banking: "If something grows like a weed, maybe it is a weed."
The Fed's merger-approval division maintained extraordinarily high standards. I analyzed 119 deals in one year alone, with every report scrutinized down to individual word placement. We operated with limited resources-our copy of American Banker circulated by seniority, reaching me three weeks late-but felt we were doing important work alongside those setting national economic policy.
My most memorable experience came when my work on a Kansas bank called Cedar Vale required Board of Governors approval. I found myself in the Fed's awe-inspiring main conference room-God's conference room-with a two-story ceiling, massive chandelier, and twenty-seven-foot Honduran mahogany table. During my first meeting, I sat terrified opposite Chairman Greenspan, surrounded by senior managers. When Governor Wayne Angell questioned applying big bank guidelines to this smaller Kansas bank, I froze when asked directly about the implications. My boss Bill Taylor rescued me, challenging Angell's position.
Initially, I viewed Fed officials as Plato's "Men of Silver"-selfless public servants pursuing only the public interest. This idealistic view eroded as I witnessed the revolving door between public service and private gain. Ernie Patrikis left after thirty years at the New York Fed for a presumably much higher salary at AIG. The head of the New York Fed departed for Goldman Sachs. Only Bill Taylor seemed to remain true to public service ideals until his early death at 53.
When I finally broke into Wall Street in 1992 after seven years of trying, I discovered that analysts weren't necessarily brilliant-they often got information directly from the companies they covered, sometimes having CFOs review their spreadsheets with winks and nods. Wanting to do real analysis, I developed a new "adjusted book value model" for valuing banks that corrected each balance sheet line item, an approach considered innovative enough that Forbes published my results despite my rookie status.
Chapter 3
The Wall Street Quid Pro Quo
I quickly learned how the Wall Street game worked through experiences on both sides of the power dynamic. When I wrote a mildly negative report about KeyCorp, the company retaliated by cutting off banking business with my firm. Conversely, after recommending Bank One stock, I was rewarded with access to CEO John McCoy, who invited my wife and me on his corporate Gulfstream jet to Los Angeles.
We enjoyed drinks, shrimp cocktail, and dinner served by the CEO himself. This was astonishing access-at the Fed, I'd never even met a bank CEO, now I was flying private with American Banker's "Banker of the Year." McCoy even called our tiny apartment afterward to thank us. The unspoken agreement was clear: fly on the CEO's jet, but don't make disparaging remarks. Get inside information on earnings, but don't criticize the company's strategy.
Client entertainment reached absurd levels of luxury. At Credit Suisse, the firm rented helicopters for golf outings and provided private dining rooms where top New York chefs served elaborate meals. While junior analysts crunched numbers in cubicles below, I could host clients (often more friends than business contacts) for exquisite dinners featuring sashimi tuna, Chatham lobster, and foie gras in Armagnac sauce on gold vellum menus, complete with signed cookbooks from celebrity chefs.
I struggled with the culture-from being ridiculously underdressed at a Hamptons party (where my wife and I could only connect with a bartender) to being reprimanded for asking tough questions. After questioning National Bank of Detroit executives about auto cycle slowdowns, I was forced to fly back for a "do-over" meeting to show my "softer side."
My biggest missteps involved resisting investment bankers' demands to help them secure deals. When asked how to turn my relationship with Bank One's CEO into "warmth into money," I admitted I had no idea. Similarly, when I criticized PNC's acquisition and a banker shouted "How do we make money from this?", I remained focused on advising investors, not generating banking fees. Unsurprisingly, I received poor marks for not being a "team player."
Chapter 4
The Downgrade That Changed Everything
By 1999, my research indicated bank stocks would turn downward. After the interstate banking law's initial consolidation wave, banks were making riskier consumer loans to maintain growth while executive compensation soared through stock options. My 1,000-page "Banks and the Red Queen Effect" report concluded I couldn't find a single bank stock worth buying-a radical position when most analysts maintained 100-to-1 buy-to-sell ratios.
On May 24, 1999, I shocked everyone by announcing "sell bank stocks" across the board. The backlash was immediate and fierce. Portfolio managers accused me of "self-destructing," CNBC commentators mocked me, and I received an ominous anonymous voicemail warning me to "be careful." Fellow analysts held conference calls to refute my claims. On CNBC that afternoon, I predicted that aggressive home lending could lead to trouble if a recession affected the housing market-a warning that would take nearly ten years to be proven true.
Within months, the market began experiencing problems. The S&P bank index peaked in July 1999 and fell over 20% by year-end, with regional banks suffering their worst performance compared to the overall market in half a century. Bank One announced missed earnings projections, losing $15 billion in market cap, and CEO John McCoy was gone by year-end.
Despite my accurate predictions, my career took a devastating turn when Credit Suisse announced its acquisition of DLJ in August 2000, creating a redundancy in banking analysts. Despite my higher Institutional Investor rankings and recent presentation to global bank regulators, I was fired in September 2000-just sixteen months after my negative call that proved increasingly accurate.
During six months of unemployment, I cycled through all stages of grief, desperately reaching out to contacts while filling days with small projects and time with my infant daughter. Finally, Prudential Securities called with an opportunity-a firm repositioning itself away from investment banking toward pure research. I testified before the Senate Banking Committee about analyst conflicts, helping form the basis for the Sarbanes-Oxley Act.
Chapter 5
The Financial Crisis: History Repeating Itself
What's most surprising about the financial crisis is how little was actually new. The fundamental causes-risky mortgages, banks pursuing aggressive growth, and weak regulation-have recurred throughout banking history, from the Panic of 1873 to the Savings and Loan crisis of the 1980s. Even "innovative" products like option ARMs resembled the risky five-year interest-only loans of the 1920s that contributed to the Great Depression. These loans, like their modern counterparts, offered deceptively low initial payments that later ballooned, trapping borrowers in unsustainable debt.
Banks historically grow at about 7 percent annually, matching nominal GDP, with returns of 1 percent on assets and 10-12 percent on equity. This relationship between banking growth and economic growth has remained remarkably consistent across different eras and countries. Yet banks constantly push for more aggressive growth, often through increasingly risky ventures and looser lending standards. In my 1999 report "Banks and the Red Queen Effect," I questioned how banks planned to sustain their expansion. Citigroup and Fifth Third projected 15 percent annual earnings growth, becoming the worst performers over the next decade, while conservative Wells Fargo, which maintained traditional lending practices and risk controls, became a top performer.
During the tech bubble, banks embarrassingly tried positioning themselves as tech companies, with one even comparing its private equity division to doomed internet incubator CMGI. Another announced plans to develop an "Internet company culture" in May 2000-two months after the NASDAQ peaked. This pattern of banks chasing the latest trend repeated itself during the housing bubble, with traditional banks trying to emulate the aggressive lending practices of mortgage specialists.
Banks should function more like utilities-reliable and steady, providing essential financial services while maintaining strict risk controls. But in pursuit of growth to attract investors, they repeatedly sacrifice these controls, expanding faster than is sustainable or safe. This often manifests in reduced loan documentation requirements, increased leverage, and expansion into riskier markets. Meanwhile, regulatory oversight has consistently weakened before banking crises, with regulators often succumbing to industry pressure to relax standards.
The magnitude of the 2008 crisis defied all historical precedents, with loan losses reaching over 3%-six times the previous historical high. I compare this to baseball's RBI record of 191 being suddenly shattered by someone hitting 1,200 RBIs-simply unfathomable. The scale of the crisis was unprecedented: major financial institutions that had survived the Great Depression collapsed within days, and the entire global financial system teetered on the brink of collapse.
In November 2007, I went on CNBC estimating the crisis could cost $400 billion-a figure my team calculated after weeks of late-night work analyzing mortgage default rates and housing market trends that still proved too low. I urged banks to disclose their true exposure to toxic assets, comparing their denials to those during the S&L crisis when banks similarly understated their problems until forced to recognize losses. I personally sold all my stocks, keeping only cash-a move so conservative my bank questioned it, but one that proved prescient as markets continued their dramatic decline.
Chapter 6
Citigroup: The Poster Child for Banking's Chronic Problems
Citigroup has been involved in virtually every major financial scandal of the past decade-Enron, WorldCom, the analyst scandals, and the mortgage crisis-costing shareholders approximately $100 billion in pretax losses from fines, settlements, and write-downs between 2001 and 2010, roughly one dollar lost for every three dollars made. The company has undergone thirty major reorganizations since 1998, cycling through four CEOs, six CFOs, seven consumer banking heads, and eight investment banking heads.
Founded in 1812 as the City Bank of New York, Citigroup predates Goldman Sachs by over sixty years and the Federal Reserve by more than a century. Since the 1890s, it has maintained its position as one of America's largest banks, placing it at the center of every major banking trend and crisis.
The bank's pattern of reckless behavior emerged early. In the 1920s, Citi plowed roughly 80% of its total capital into Cuban sugar producers, only to face disaster when sugar prices collapsed by nearly 95% in under a year. Rather than writing down these bad loans, Citi doubled down, investing more money and even becoming a major sugar producer itself. The bank eventually securitized this debt and sold it to U.S. investors just before the 1929 crash.
By the early 1920s, Citi became the first U.S. bank to exceed $1 billion in assets under CEO Charles Mitchell, nicknamed "Billion Dollar Charlie." When the market crashed in 1929, Senator Carter Glass declared "Mitchell more than any 50 men is responsible for this stock crash." During the subsequent Pecora Commission hearings in 1933, Mitchell admitted earning over $1 million in salary and bonuses in 1929 while paying no income tax.
Walter Wriston, CEO from 1967 to 1984, despised New Deal banking regulations and systematically developed products to circumvent them. Wriston deliberately avoided asking for Federal Reserve approval, believing it's "easier to ask for forgiveness than permission." Despite his anti-regulation stance, Wriston didn't hesitate to seek government help during crises.
Determined to transform Citi into a growth stock like IBM, Wriston publicly committed to 15% annual earnings growth in 1971. He delivered on this promise by dramatically increasing lending while reducing loss reserves. By the mid-1970s, Citi had made massive bad loans to tanker companies, real estate developers, and even CB radio manufacturers, suffering its first loss since the Great Depression in 1977.
Sandy Weill, unlike Wriston, wasn't an innovator but excelled at dealmaking, cost-cutting, and wielding Washington influence. The defining moment came in 1998 with the merger between Travelers Group and Citicorp-then the largest corporate merger in history. Weill and Reed lobbied to overturn Glass-Steagall, ironically dismantling the very regulation Citi's earlier excesses had necessitated.
The 2008 financial crisis perfectly encapsulated Citi's long, sad history. The company dove deeper into toxic mortgage investments than almost any other bank, entering near the market peak. When subprime assets deteriorated, Citi understated its exposure by about $40 billion during an investor conference call. Citi received the largest industry bailout-actually multiple bailouts-as regulators deemed it too big to fail in November 2008.
Chapter 7
My Battle with Citigroup
My personal battle with Citigroup began in October 2009 when I questioned their accounting practices, particularly regarding $40 billion in deferred tax assets-credits from the IRS representing over a third of its core equity. General Motors, in a similar situation with $53 billion in tax credits, wrote them down to $8 billion. But Citi refused to take this step. My research report suggesting they might need a $10 billion write-down caused their stock to drop over 5% in a single day.
Despite the financial crisis validating my earlier concerns about Citi, the company effectively blacklisted me throughout 2009 and most of 2010, refusing meetings while seeing other analysts multiple times. This was particularly troubling since American taxpayers owned more than 25% of Citigroup at the time.
In June 2010, I finally approached CEO Vikram Pandit directly in a Boston office building lobby. Though he seemed decent and agreed to a meeting when confronted, I reminded him I'd been hearing similar promises for a year without any firm dates being set. I finally forced the issue during a July earnings call, asking about my meeting status in front of hundreds of investors.
On October 1st, I finally had my meeting with Citi's management. I arrived early, energized for the confrontation, and brought nine investors with me. When the CFO-Citi's sixth in a decade-greeted us, he avoided eye contact. Pandit seemed more like a research scientist than a CEO. When I directly asked why I'd been frozen out for two years, Pandit looked down silently before a manager interjected that we'd "handle that later."
After the meeting, when I called to clarify some points, I received the most infuriating explanation yet: I hadn't been granted access because my name hadn't come up when they asked institutional investors about influential analysts. Hours after our meeting, I discovered Citi had already given the New York Times a statement attempting to discredit my analysis before I'd even published it.
Despite marketing campaigns touting "the New Citi," I've concluded the company will never fundamentally change. After 15 years of continuous reinvention since the 1998 merger, today's "New Citi" ironically resembles the pre-1998 Citicorp. The company spent a decade acquiring assets it's now trying to shed-great for investment bankers who get paid both ways, terrible for running a stable bank.
Chapter 8
A Better Version of Capitalism
A decade ago, I met with the New York State Banking Department Superintendent who surprisingly admitted that banks might listen more to me than to her because I could move their stock prices. This revealing conversation exposed a critical weakness in our financial system: the diminished authority of regulators compared to market forces. This exchange highlights a fundamental question: should we fix banking through government regulation or market forces? Currently, we have the worst of both worlds-a supposedly capitalistic system with unenforced rules where government bails out banks' worst decisions, creating moral hazard and systemic risk.
I believe we need a better version of capitalism-not a Wild West system, but one with transparency that lets outsiders see what's happening and holds banks accountable. My solution follows a simple ABC approach: better Accounting standards, real Bankruptcy consequences, and Clout for outsiders against insiders. Each component addresses a critical flaw in our current system that contributed to past financial crises.
All 10,000 publicly held U.S. companies follow accounting rules set by the Financial Accounting Standards Board, but these rules are based on stale, decades-old approaches despite vastly increased corporate complexity. The system requires experts to interpret and contains enormous gray areas, essentially allowing golfers to keep their own scores without witnesses. Modern financial instruments, derivatives, and complex corporate structures have far outpaced these antiquated standards, creating opportunities for manipulation and obscuring real risks.
The solution to banking problems is clear enough for even a child to understand: people and companies that don't pay their bills must be held accountable. No bank should be "too big to fail"-those that get into trouble should be allowed to fail. This principle of creative destruction is fundamental to healthy capitalism, yet we've created a system that protects the largest institutions from their own mistakes, encouraging reckless behavior and excessive risk-taking.
The model for proper banking isn't found in Wall Street giants but in M&T Bank, a boring regional player from Buffalo that's been the best-performing large bank stock since 1983. M&T focuses on avoiding losses and minimizing risk rather than chasing growth. Its executives earn about one-tenth what other bank executives make while owning ten times more stock. This alignment of interests creates a culture of prudent risk management and long-term thinking. Their success proves that sustainable banking doesn't require complex derivatives or excessive leverage.
Bank executives wield tremendous power while the entities meant to check them-boards, analysts, and regulators-are either co-opted or ignored. Boards have largely failed in their oversight duties. A McKinsey survey revealed only 21% of directors claimed complete understanding of their company's strategy, dropping to a mere 6% in the financial sector. This knowledge gap is particularly dangerous in banking, where complex financial instruments and interconnected risks require sophisticated oversight. The problem is compounded by board members who often lack relevant expertise or independence, serving multiple boards simultaneously and maintaining close ties with executives they're supposed to monitor.
The path to reform requires strengthening these oversight mechanisms while creating genuine market consequences for failure. This means implementing clearer accounting standards, enforcing bankruptcy laws even for large institutions, and empowering outside stakeholders to exercise meaningful control over bank behavior.
Chapter 9
The Meaning Beyond Money
My negative call on banks in 1999 confused many who couldn't understand why I'd risk my career for principle rather than profit. This stemmed partly from my middle-class upbringing in Queens, where I learned that success without satisfaction is meaningless. This lesson was powerfully illustrated by my stepdad's restaurant experience, where he pointed out a regular customer - a wealthy businessman who, despite his material success, lived a lonely, joyless existence. "Look at that schmuck," he'd say. "All the money in the world, and he's miserable." This early exposure to the disconnect between wealth and happiness profoundly shaped my professional ethics.
During my exile from banking, I discovered unexpected gifts in adversity. The forced career pause coincided with my daughter's birth, allowing me precious time I would have missed in my usual 80-hour workweeks. I witnessed her first steps, heard her first words, and experienced countless small moments that reshaped my definition of success. Since returning to banking, I've fiercely protected this family balance, often reorganizing my schedule in unconventional ways - like scheduling important business dinners later to ensure I can read bedtime stories or attend school events. The contrast between my professional and personal worlds can be stark and sometimes surreal - one moment I'm in heated discussions about billion-dollar mergers, the next I'm sitting cross-legged in a music class, bouncing my toddler on an exercise ball to "Old MacDonald."
My wife, with her scientific background, takes a pragmatic view that life has no inherent meaning beyond biological imperatives of survival and reproduction. However, I've developed a different philosophy through years of professional and personal experience. I believe life's meaning emerges from the intersection of three elements: discovering what you're genuinely good at, finding what you truly love doing, and using these talents to improve the world around you. This aligns with the Jewish principle of tikkun olam - "repairing the world" - which suggests we each have a responsibility to make the world better, even in small ways.
While many on Wall Street measure success solely in dollars and cents, I've found deeper satisfaction in working to improve banking practices. This means not just identifying problematic behaviors but actively promoting positive changes - whether through mentoring younger analysts, advocating for more transparent practices, or helping clients make decisions that benefit both their bottom line and broader society. My journey through career highs and lows has taught me that professional setbacks often open doors to unexpected opportunities for growth and meaning. The death of close family members and the joy of raising children have reinforced that money alone brings little lasting fulfillment. Though I maintain ambitious professional goals, I've found that truly meaningful work is its own reward - it's in the simple rhythm of kissing my wife goodbye, hugging my kids, and heading to work knowing that I'm contributing to something larger than myself.
