On a steamy November day just hours after the crash of American Airlines Flight 587, Mike Mayo, Prudential Securities Inc.’s curmudgeonly bank analyst, was telling a packed room of investors why bank stocks stink.
“We are cautious on the banks,” Mr. Mayo said. “More and more, we see them relying on hot money for their funding-and what’s more, they have more than $1 trillion in risky, potentially bad loans off their balance sheets.”
Short and peppy, with a crooked smirk of a smile and hair cut stylishly short, the 38-year-old Mr. Mayo cut a funny figure among the analysts sitting together in the St. Regis Hotel’s swanky Versailles Room. He wore a sparkly orange Hermès tie, and viewed from the audience gathered for a two-hour session on bank and insurance stocks, he had the look of a young Danny Thomas-or as he described himself, “You can’t miss me; I’m an ugly version of Tom Cruise.”
But the message Mr. Mayo came to bring-the one he’s been spouting for years-was far from funny, either to those in the room or to the thousands of New Yorkers in the banking and insurance industries.
The markets are getting crunched, investors are panicky, and Mike Mayo has a sell rating on 16 of the 35 stocks he covers-a ratio in sharp contrast with the sell-ratings figure of 3 percent that currently prevails on the Street.
Pessimism and skepticism, the great attitudes of past bear markets, are making a comeback, and Mr. Mayo-who wields a sell rating like his fellow bankers wield a cell phone-is suddenly front and center.
He’s the analyst to watch and listen to: the Henry Blodget of the moment, bringing to the banking and insurance industries the kinds of ratings that can send stocks spiraling downward, in much the same way that Mr. Blodget once sent them soaring.
A darker, more cynical mood prevails on Wall Street these days. As The New York Times reported, Mr. Blodget, Merrill Lynch’s effervescent Internet analyst gone off to write his memoirs. And now Mr. Mayo is perfectly placed-the anti-Blodget if ever there was one.
Mr. Mayo is not writing his memoirs. In fact, his approach to the moment is to don a green eyeshade and search out the bitter accounting truths of the companies in investor portfolios.
Forget about schmoozing with chief executives or putting a buy rating on a company to grease the investment-banking wheels. Geekdom is in. Better to know for yourself the hard, cold numbers than to trust the corporate sleight-of-hand that has left many a happy, enthusiastic investor regretting that he or she didn’t take their eyes off the cheerleaders and watch the players more closely.
For almost 10 years now, Mr. Mayo has been peddling that very investment philosophy. With a mathematics degree from the University of Maryland and an M.B.A. from George Washington University, Mr. Mayo came to Wall Street in 1992, following four years as an analyst at the Federal Reserve. A product of the Maryland suburbs, he was intrigued by the flash and dance of the Street. He was always a smart kid; now he would get paid for it.
After spending some time as a junior analyst at the Union Bank of Switzerland and Lehman Brothers, he moved to Credit Suisse First Boston in 1997, and soon began polishing his contrarian tone. The culmination was his famous call in 1999 when, as a senior bank analyst at CSFB, he recommended that his clients sell bank stocks across the board.
The bull market was still in full force, and sell ratings, especially on high-profile bank stocks, were mostly unheard of-especially at CSFB, which had banking relationships with many of the companies on Mr. Mayo’s sell list. Yet, sure enough, the banks crashed. Mr. Mayo, however, got little thanks for his call.
While there were those who appreciated his blunt views, the banks on the receiving end were less enamored-to say nothing of his employer. So when CSFB merged with Donaldson, Lufkin and Jenrette in September 2000, Mr. Mayo and his team of analysts were fired. Ranked No. 2 by Institutional Investor magazine, Mr. Mayo was replaced by a lower-ranked D.L.J. banking team.
By all appearances, it seemed that another analyst was out because of an unpopular-though correct-call.
(The Securities and Exchange Commission is already investigating CSFB’s tech-banking, research and public-offering practices, and the recent case of CSFB media analyst Laura Martin, who was fired a month after she downgraded her entire range of stocks following the Sept. 11 attack, suggests that bankers and analysts continue to butt heads. Earlier this year, CSFB brought in John Mack as its chief executive, partly to shore up the Chinese wall between analysts and bankers.)
But though Mr. Mayo may have been a martyr, the ignominy of being out of a job still looms large in his mind.
“It was very scary,” he said, digging into a cold chicken platter after his luncheon presentation. “I was ranked No. 2 by Institutional Investor in two different categories. I’d reached the highest level of my career, and all of a sudden I couldn’t find a job.” So he settled in at his Upper East Side apartment and put in calls to everyone he knew-friend and foe. No interest.
Despite being interviewed by all the major firms, not one offered him a lifeline. “They would say to me, ‘We want to make sure that you are mature in how you approach companies,’” he recalled. “With ‘mature’ meaning ‘Can you make friends with management?’”
Indeed, there had always been criticism leveled at Mr. Mayo for proclaiming, perhaps a bit too loudly, his antipathy for, say, a Bank of New York Company Inc., a Bank One Corporation or a J.P. Morgan Chase & Company. Brash and not a little bit preachy, Mr. Mayo had a way of sticking out from the pack, and not a few of his peers saw his schtick as self-serving. Not surprisingly, Morgan Stanley and Merrill Lynch didn’t rush in with offers. In a market still in love with itself, Mr. Mayo’s act had become stale.
So Mr. Mayo played Mr. Mom, taking his 5-month-old daughter to music class in Manhattan-”just me, my daughter, six nannies and two mothers,” he recalls-though he was still plugging away on the phone.
Finally, in February, a break. Prudential Securities, in an effort to cut costs and differentiate itself from the bulge-bracket firms, had fired a good chunk of its investment-banking staff and announced that from here on in, its research would utilize the sell rating on a more frequent basis. Indeed, there was no need for Prudential to brag of the wall between research and banking, because the firm had few real bankers to speak of.
Mr. Mayo and his five-strong team of analysts had suddenly found not only a home, but also a market environment more conducive to their damn-the-bankers style of research. “I was hired to be a role model,” Mr. Mayo said. “To be a catalyst, to show how you can use an unbiased research strategy. My main goal is to make investors money with my recommendations, but I also want to make it easier for people to use sell ratings.”
He didn’t waste much time. First came the Bank of New York, which was trading at $47 in mid-March. Mr. Mayo slapped a sell rating on the stock, even while the vast majority of his peers maintained buys. It now trades at $39, after hitting a low of $30. Then came J.P. Morgan Chase. Mr. Mayo put a sell on it in May, when the stock was in the high 40′s. Now the stock changes hands at around 39, off a recent low of $29. Yet despite the support of his firm and a Street environment admittedly more receptive to sell ratings, the going remains tough.
“I’m still getting beaten up. It’s like getting punched about 10 times,” he said. “‘You have not done your homework,’ they say. ‘You’re doing it for P.R.’” While the companies that Mr. Mayo follows pretend to tolerate him, they also go out of their way not to help him, refusing to answer his questions on conference calls and limiting his access, he said. But with the continuing application of Regulation F.D.-an S.E.C.-imposed ruling that prevents companies from doling out private information to privileged analysts-lack of company cooperation matters little. Mr. Mayo said that he and his team just burrow all the deeper into the regulatory filings.
Mr. Mayo has also found that company cooperation matters even less in a dicey market. “Management does not telegraph when something is going to go wrong,” he said. “‘You don’t know what you’re talking about,’ they’ll say. Ironically, I’ve found that whenever a company fights me the hardest, that’s when they’re having the most problems.”
This is all well and good for Mr. Mayo’s reputation as a contrarian, but whether or not a sell-first-ask-questions-later research strategy can be a money-maker for a securities firm, even in a bear market, is still very much in doubt. It’s a well-known fact that research staffs at all the major banks lose money; investment-banking fees are how the banks earn their billions. So how will tiny little Prudential make money off Mr. Mayo?
Probably with some difficulty. “Our pitch is, ‘Please, Mr. Investor, reward us for our effort, because it takes three times as much work to do [your] research by independent means than to get it spoon-fed by management,’” Mr. Mayo said.
Every day now, Mr. Mayo calls down to his traders to get an idea of how much trading volume they’re doing in bank stocks. “We’ve got momentum,” he said, “but we need to see more of it.”
And so what if he’s become a little bit obsessed? Asked what hobbies he has, Mr. Mayo thinks a bit, but can’t really come up with an answer. “I did do a 1,500-page report on the banking sector a few years ago, to let people know that I really know what I’m talking about,” he said.
Would that count as a hobby, then? “Well, I do like to read philosophy-though it’s been years [since] I’ve read that kind of stuff,” he said. “So, yeah, I guess you could say that my job has been my hobby.”
For the moment, Mr. Mayo may well be Wall Street’s top geek. Which is the way he’s always wanted it. “It’s nice when the style of research you’ve always practiced comes back into vogue,” he said.
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