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Recommended WSJ: “Why Wall Street Can’t Handle the Truth”

Posted by Larry Doyle on November 6, 2011 3:54 PM |

Mike Mayo is a highly regarded bank analyst on Wall Street. While Mike has had some outstanding calls over the course of his career, he is most widely regarded for ‘taking the road less traveled’ when it comes to speaking his mind and not merely serving as a shill for the institutions at which he has worked.

I write that not to denigrate those involved in research on Wall Street. Many research analysts on Wall Street are challenged to balance their career preservation interests against the desire of their employers to maximize revenues.

Mayo has uncannily distinguished himself for making hard calls which fly in the face of the institutional interest of the firms looking to gather client assets and sell investment products. 

The Wall Street Journal provides a riveting review of Mike Mayo’s unique position in the industry. I particularly appreciated Mayo’s ‘sense on cents’ approach to fixing our banking system.

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.

It’s easy to 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.

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, like banning specific types of securities or deals.

The more effective solution would come from letting market forces work. That doesn’t mean no rules at all—a banking system like the Wild West, with blood on the floor and consumers being routinely swindled. We need a cultural, perhaps generational, change that compels companies to better apply accounting rules based on economic substance versus surface presentation.

Even in 2011, some banks were woefully deficient in detailing the amount of their securities and loans that are vulnerable to the ravages of the European financial crisis. The solution is to increase transparency and let outsiders see what’s really going on.

Spoken in the truest fashion of ‘sense on cents’.

If you have any interest in understanding the inner workings of Wall Street, I strongly recommend, Why Wall Street Can’t Handle the Truth.

Is there anybody who would deny that Mr. Mayo belongs in the Sense on Cents Hall of Fame?

Questions and comments encouraged and appreciated.

Larry Doyle

Isn’t it time to  subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook? Do your friends, family, and colleagues a favor and get them to do the same. Thanks!!

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

 

  • Peter S.

    “We have a purportedly capitalistic system with a lot of rules that are not strictly enforced.”

    If Mike means that the firms involved in fraud over the last two decades should not have been allowed to plead “neither admit nor deny,” and that the individuals involved were prosecuted and not promoted – than yes I agree Mike belongs in the S&C Hall of fame.

    But that’s where Wall Street’s best fall short – is that they refuse to blow the whistle on those wreaking havoc (fraud) on the unwitting – many just ride the slow motion train wreck, hoping to gain a much distance a possible prior to jumping off at a predetermined point knowing full well that all others remaining will crash and burn. Then they are called the winners.






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