Mike Mayo on banks

Lack of banking reform worries Mike Mayo

The Credit Agricole Securities' analyst is worried about the lack of reform in the banking industry.

Despite a global recession, hundreds of billions of dollars in losses and hardships suffered by millions of people, the international banking system remains largely unreformed — a fact that gives Mike Mayo sleepless nights.

“The financial crisis has not changed a thing,” writes the outspoken bank analyst from Credit Agricole Securities in his recently published book, Exile on Wall Street, which is subtitled: One Analyst’s Fight to Save the Big Banks from Themselves.

The quickest way to solve a problem is to find its root cause, and Mayo argues that the way banks pay their staff lies at the root of the financial crisis. “I summed up the cause of the crisis in one word: incentives,” he said on a conference call earlier this week. “I do feel that incentives are at the root at the [mistakes] that took place before the crisis, across the crisis and are still taking place today.”

Bank CEO compensation is based on current earnings, which encourages risk-taking to generate short-term profits, Mayo said. “The CEO can be long gone by the time the problem shows up.”

However, the mechanism has not changed much even after Lehman’s collapse. “KeyCorp’s CEO made $22 million even when the company lost $1 billion for the last three years,” he said. “That’s not capitalism but entitlement. This is not the way the system should work.”

Instead, bank executives should be rewarded for long-term performance. “Let’s make sure the CEO’s interests are in line with the shareholders’ interests,” said Mayo. “One way would be to say the CEO cannot have his or her incentive pay until after they have been retired for three years ... In that way, he or she cannot dress up the company, get their big payout and leave the next leader to suffer.”

Another solution, Mayo proposed, would be to require the CEO to have 90% of his or her net worth in the company.

CEO compensation is not the only thing Mayo worries about. Employees are clearly less likely to criticise bosses who pay them big salaries, but companies and governments suffer from the same problem. “Accounting firms and rating agencies still get paid by the company they analyse, regulators still have an incentive to go easy on companies and even politicians still have an incentive to give everybody what they want because in the short term they get votes, even if they hurt the economy in long term,” he said.

Mayo points out that the best-performing bank during the past three decades was M&T Bank in Buffalo, one of the slowest-growth cities in the US. “Slow growth for banks does not have to be bad,” he said. “In fact, it can be good as long as the bank has good risk management, doesn’t mess up too often and accepts the limitations [of slow growth].”

The core of the financial system is good, according to Mayo, but he is still worried about the lack of reform. “I had a moment of fear last week when I was sitting in my office, and for a second I thought about the possibility... what if nothing changes?”

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