The Worst Big Bank on Wall Street?

Mike Mayo, a bank analyst who has been covering Wall Street for more than 20 years, had an epiphany recently. It suddenly occurred to him that our recent financial crisis "didn't occur because of something that banks did. No, it was the natural consequence of the way banks are, even today."

In his new book, Exile on Wall Street, Mayo argues that the big Wall Street banks are set up nowadays to take excessive risks, while providing outsized compensation for bankers. And despite numerous though lightly enforced regulations, the federal government is there to bail these institutions out when things go wrong.

Mayo believes that Citigroup (NYSE: C  ) , which he describes as the "poster child for the financial industry's problems," provides a perfect example of all that is wrong with our big banks right now. The two chapters that he devotes to Citi are very disturbing.

A dubious track record
Mayo shows us that over the past decade Citi has been "involved in virtually every major financial screw-up, from Enron to WorldCom, to the analyst scandals of the tech bubble, to the mortgage fiasco." And this has cost shareholders a lot of money. Mayo calculates that this dubious track record has resulted in "about $100 billion in pre-tax losses from fines, settlements, reserves, or writedowns from 2001 to 2010."

Perhaps more troubling is that Citi's entire history reveals a similar recklessness. Mayo notes that the company has "come close to failing six times in its history." And on many occasions it has required a federal bailout to remain in business. Sadly, a predictable pattern has emerged during the course of Citi's history. First, it takes excessive risks and then gets into trouble. At that point, the government has to "step in simply so it can survive." Ultimately, new regulations are created, which Citi "grumbles about and then doesn't follow anyway."

The latest version of this pattern, of course, happened during the financial crisis. Citi got the "mother of all bailouts" for a bank. According to the congressional oversight panel which oversees the Troubled Asset Relief Program, Citigroup received $476.2 billion in cash and guarantees during the financial crisis. This made it No. 1 among banks, followed by Bank of America (NYSE: BAC  ) and Morgan Stanley (NYSE: MS  ) .

Perhaps the worst part of the entire Citi story of recent years is that nothing has changed, according to Mayo. He feels that the dubious accounting, excessive risks, and outsized executive pay "are still happening." He writes, "It's like we've learned nothing. Forget it, Mike. It's Wall Street."

First among equals
Citi, of course, isn't the only bank on Wall Street with a troubled history, and Mayo, of course, makes that clear in his book. In his gripping chapter on the financial crisis, he notes that the entire banking sector was making record profits in the years prior to 2007 and 2008. He also admits that he became very concerned when he learned that Wells Fargo (NYSE: WFC  ) and JPMorgan (NYSE: JPM  ) -- traditionally very conservative banks -- admitted in November 2007 to having "toxic housing-related loans on their books." In one of the more alarming asides, Mayo admits that in the fall of 2008 he went to 100% cash in his own portfolio. And he also kept $10,000 in cash in his apartment. Apparently, one of the smartest bank analysts on Wall Street thought we were in some serious ... stuff.

Mayo tells an interesting story about when he was called upon to testify before the Financial Crisis Inquiry Commission in January 2010. He was there to provide a "check on the statements" made by the CEOs of Goldman Sachs (NYSE: GS  ) , Merrill Lynch, and JPMorgan who appeared just before he did. In his testimony, he compared financial creativity over the past decade to bad sangria. You had "a lot of cheap ingredients repackaged to sell at a premium. It might taste good for a while, but you get headaches later and you have no idea what's really inside."

Back to our ABCs
Despite his tough stance toward the big banks, Mayo is an optimist who "fundamentally believes in the US banking system." He feels we must move toward what he calls the ABCs. "A" stands for more transparent accounting. "B" stands for bankruptcy -- in other words, let banks fail if they deserve to. Finally, "C" stands for clout -- let's make sure regulators, shareholders, and others have just as much clout as the insiders who have been allowed to stack the deck in their own favor for too long.

Exile on Wall Street provides tremendous insights on the failures of our banking system and should be required reading for citizens who are concerned about our financial system. One of the biggest takeaways of all is that despite the enormous pain and suffering of the financial crisis, things are not that much better today. I think it's fair to say that the financial crisis of 2008 caught most people by surprise. Will the same be true of the next one?

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John Reeves does not own shares in any of the companies mentioned in this article. You can follow him on Twitter @TMFBane.

The Motley Fool owns shares of Citigroup, Wells Fargo, JPMorgan Chase, and Bank of America. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of The Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (26) | Recommend This Article (56)

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  • Report this Comment On November 25, 2011, at 11:34 AM, lawman01 wrote:

    I am Disable an can't get a break from CITI, They tell me that the government has sat a flat rate on mortages, at 38%. and they will not let me refinance. I've had this mortage since 2003 it started out at $33,000.00 and it's still at $32,000.00 I've paid them around $21,000.00 in interest. Something should be done about this. It's as if they don't care about the home-owner.

  • Report this Comment On November 26, 2011, at 12:10 PM, thymekeeper wrote:

    I think I might look into refinancing with another bank, Even on disability you get enough to pay on a 40,000 loan.

  • Report this Comment On November 26, 2011, at 12:40 PM, mm5525 wrote:

    That 38% is the DTI (debt-to-income ratio) when you compare your monthly income with the mortgage payment and any other monthly obligations that show up on your credit report. The DTI ratio is essentially the same regardless of lender because that policy is set by the government (FHA/FNM/FRE). If you have monthly obligations such as credit card debt, try to pay off the biggest monthly payment possible to make your DTI ratio lower and then reapply. Your DTI ratio will be lower.

    You should also ask, or review your RESPA documents when you applied, to see where your DTI ratio is per their numbers. It will show a "front-end DTI ratio" as well as a "back-end ratio." The front is your income compared to the proposed mortgage payment only, the back is the mortgage payment combined with all other obligations on your credit report.

    Don't forget the mortgage payment is also factoring in taxes, insurance, and potentially PMI or condo/HOA dues.

    Also, by all means make sure you've reviewed your credit report to make sure it's accurate. It'd be a shame to see a simple error be the thing that keeps you from qualifying.

  • Report this Comment On November 26, 2011, at 12:45 PM, zippeit wrote:

    or switch to a credit union. Just get on the internet and search for credit unions in your area and start calling and asking questions. until you find one that is right for you.

  • Report this Comment On November 26, 2011, at 1:18 PM, mikecart1 wrote:

    People need to understand what you are in the stock market for, to buy stocks low and to sell stocks high if you are long or the reverse if you are short. I don't care what C's problems are. If they are selling low now, I say they are, I say buy. More articles should be about the stocks of companies and not the companies themselves.

  • Report this Comment On November 26, 2011, at 4:50 PM, TMFBane wrote:

    @mikecart1,

    That's certainly one way to invest. Another way -- one that is recommended by a lot of great investors -- is to think of becoming an owner of the company when you buy shares of its stock. If one takes that approach, then the underlying business matters a lot. Remember, both Lehman and Bear Stearns were "selling low" at one point too. This article was, of course, a book review. The author Mike Mayo, who is an extremely talented bank analyst, thinks Citi has a very poor track record. He also doesn't feel it has changed all that much since the "mother of all bailouts." I definitely think investors should consider his views before buying (or holding) shares of Citi.

  • Report this Comment On November 26, 2011, at 9:55 PM, jomueller1 wrote:

    Very good article.

    As a European I see an additional interpretion of the facts underlying the book. The mentioned history of citi shows what is wrong with the country. This wrong starts with the people and continues with the institutions and does not end with the government.

    In the Anglo-Saxon life money has an oversized importance. That's why the capitalistic ideology is pursued vigorously. Just the term "making" money where people in other countries "earn" money shows the warped attitude.

    Secondly, the US people are very aggressive and ruthless.That is manifested in "history" from slaughtering the natives, expanding the colonies with one war after another, colonising countries like the Philippines and Hawaii. The US fought in more wars than any other country ever. The abuse of workers is second to none. The robber barons did not get their "title" for no good reason.

    At the same time the people in power succeeded in brainwashing the general public into believing that the US is the "greatest country in the world" and that "Americans" are superior. all that without ever developing social behaviour or institutions like health care for all. Poor "Americans" who do not see how they are being used.

    In the view of some the public education system has been introduced to indoctrinate the people and the many churches are there to make the suffering more pallatable.

    Besides the findings in Mayo's book my father, who was a book keeper, called the bankers legalised street robbers.

    How else can it be explained that there is no cap on interest rates? Why are people thrown in jail because the cannot pay their bills as if that would miraculously put money in their pockets? Why are the people charging interest rates and fees like the mob walking free? Because the financial sector is the mob!

  • Report this Comment On November 26, 2011, at 11:23 PM, jm7700229 wrote:

    I'm not sure what European country you are from, but you need a little more knowledge of history. Americans didn't displace the natives, Europeans did. We didn't colonize the Philippines, the Spanish did. We took it from those Europeans and gave them independence less than 50 years later. We didn't colonize Hawaii, it was annexed under an agreement initiated by members of the then independent government of Hawaii.

    Sadly, we have fought in too many wars, but hardly more than any country ever! And our three biggest had to deal with the problem of slavery introduced to our continent by you Europeans, and two to bail out France from savage German aggression.

    Your attitude suggests that you are French. I know you've never forgiven the "Anglo-Saxons" for saving your butts from Kaiser Bill and Uncle Adolph. You make good wine, though.

  • Report this Comment On November 27, 2011, at 1:15 AM, Kauaicat wrote:

    jomueller1, if you were intellectually honest, maybe you wouldn't be so ethnocentric.

    If you are French, then you should compare the results of the French Revolution with the American Revolution - Robespierre and his followers executing thousands on the guillotine followed by the imperialistic dictatorship of Napolean vs. the Declaration of Independence, the Constitution and the Bill of Rights - documents unparalled in human history that did lead to the creation of the greatest country on earth - and millions of legal and illlegal immigrants continue to prove it every year.

    If you are German, LOL, nothing further needs to be said...

  • Report this Comment On November 27, 2011, at 3:13 AM, Ghost111 wrote:

    Jm7700029. I suggest that you study a bit of history before lecturing others on that matter. Point 1 - most of the slavery which took place in the usa occurred AFTER the USA had fought for and won its independence from England so to claim the people who enslaved africans were europeans and not americans is blatantly false! It was in fact americans operating that slave trade. As to the wiping out of almost all native americans, most of those natives as well were killed and exterminated AFTER the Usa had won its indendence from England meaning most of those acts were done by AMERICANS, not europeans. Americans are also the ones who slaughtered native Latinos who occupied most of the southwest and western states long before white americans "expanded" westward. By the way, before america "bailed out France" in WWII. The French first bailed out america when it faught for its freedom against England. Their naval blockades of key US ports and thier military assistance is a largeart of the reason why americans dp not still answer to a king and queen in England. I won't even bother going into your twisted half truth take on what happened with Hawaii. LOL

  • Report this Comment On November 27, 2011, at 3:26 PM, BoxerRebellion wrote:

    It is a shame that as Americans we are constantly being scolded to be less self-centered and "ethno-centric" yet other Nationalities continue to pinhole us (AMERICANS) into stereotypes perpetuated by myth and misinformation. Thank you Ghost111, Kauaicat, jm7700229 for setting the "European" straight. I suppose now we are to abstain from 'judging' ALL europeans based on his/her lack of insight.

    I will only do so, when he/she retracts the misinformation (i.e apologizes for his/her ignorance). Otherwise, I will assume that jomueller1 believes that he/she is still correct in his/her interpretation of Americans,and that nothing was learned from this little dialogue. And thus I, too, will continue to misjudge europeans, thanks to jomeuller1's "extraordinary" comments.

    Can't wait to read the book!

  • Report this Comment On November 27, 2011, at 9:34 PM, mcintorb wrote:

    Let's not forget folks that companies are people. This particular company would appear to be a serial offender against securities laws, banking regulations, and probably other federal laws including mail and wire frauds.

    This "person" should accordingly be investigated, along with its known associates and co-conspirators (namely its board members and executive officers). Investigators should be specifically barred from resolving any violations "without any admission of guilt"--the company should either be required to admit violations, or put on trial in criminal court.

  • Report this Comment On November 28, 2011, at 1:52 AM, limanova wrote:

    Lack of prosecution of financial crimes evidenced in these last two administrations has to stop! And NO more bailout when they steal rope and hang themselves. Enron, C, BP or others willing to multiplied times flagrantly flout law and regulation should be dismembered or allowed to become extinct by bankruptcy. Better use of their niche by more prudent companies will follow. Washington blog brought this graph to light :A new study out from Syracuse University shows that the number of federal prosecutions for fraud at financial institutions has been steadily decreasing since 1999. [via ThinkProgress]

    It concludes quoting financial crime expert Bill Black saying "We have to fire Eric “Place” Holder and all other government officials who are blocking prosecution of the criminals who caused the economic crisis."

  • Report this Comment On November 28, 2011, at 8:52 AM, TMFBane wrote:

    Just came across this piece that shows the bailout of the big banks was much larger than we thought:

    http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-un...

    So the banks were either in worse shape than we knew (and this, of course, should have been known when we were discussing reforms) or they just got a really sweet deal from the Fed. Either way, it's not great for ordinary citizens.

  • Report this Comment On November 28, 2011, at 12:27 PM, TMFBane wrote:

    It looks like the worst big bank on Wall Street is going to court:

    http://www.nytimes.com/aponline/2011/11/28/business/AP-US-SE...

    More on this soon...

  • Report this Comment On November 28, 2011, at 2:49 PM, PhulishMortal wrote:

    Thanks for both of those links, TMFBane.

  • Report this Comment On December 02, 2011, at 10:16 AM, DJDynamicNC wrote:

    "So the banks were either in worse shape than we knew (and this, of course, should have been known when we were discussing reforms) or they just got a really sweet deal from the Fed. Either way, it's not great for ordinary citizens."

    Or both.

    The only surprise about all this is that people are surprised it happened. The entire point of capitalism is to accumulate wealth; wealth equals power; and big surprise, a few big players have accumulated more wealth than the rest of us and now they are using that power to ensure they accumulate the rest. This isn't an aberration or a failing of capitalism - it IS capitalism. So you're right, it's not great for ordinary citizens, because in a lot of ways capitalism simply isn't great for ordinary citizens.

  • Report this Comment On December 02, 2011, at 11:00 AM, MajorBob04 wrote:

    "So you're right, it's not great for ordinary citizens, because in a lot of ways capitalism simply isn't great for ordinary citizens."

    Capitalism is the worst form of economic system. Except all the rest that have been tried. (paraphrasing Winston Churchill in his comments on Democracy).

    Socialism, communism, nepotism, etc. are worse.

    So capitalism isn't the best system for every individual. But I think it's the best system, and the system we've got right now.

    Let's focus on making it better . . . e.g. by holding criminals and companies that ignore regulations trule accountable, not just let them agree to pay money and not admit any guilt.

  • Report this Comment On December 02, 2011, at 12:10 PM, KnightsValley wrote:

    Lawman01: there are many programs out there for individuals like you that the government and banks are providing, even Citibank. Perhaps your timing for applying was slightly off but keep trying with your loan officer or the loan officers manager because there is a program out there to lower your monthly pmt & take advantage of an interest rate around 4%.

    I think everyone is missing the point, the European is being smug because they as a whole chose a different path than we Americans. But let's look at "we Americans" means: We are Chinese, Japanese, Korean, Pakistani, Iranian, Egyptian, Nigerian, French, German, Swedish, Russian, English, Irish, etc... And we do believe in ourselves, in our country, and in all of our humanity but feel it is up to the individual to take responsibility of themselves for theirselves and government is to help us achieve a level playing field. The near term problem we have been having is that our politicians have forgotten what government is for so rail against it for their own political ends. In so doing, they under cut that what we have achieved. I like what the Left has to say but I like what the Right has to say as well. I don't like how they say it. Our financial mess is partly to do with government turning its eyes away from the financial sectors as opposed to being overly intrusive. If the right over turns the Frank-Dodd bill then perhaps it is best to bring back the Glass-Steagul Act to get separation from some of the worst abuses in our financial system most recently.

  • Report this Comment On December 02, 2011, at 1:27 PM, DJDynamicNC wrote:

    "So capitalism isn't the best system for every individual. But I think it's the best system, and the system we've got right now. "

    I think there is a lot that capitalism does well. But "best" is too broad a term. There are certain things that capitalism excels at. If you want streamlined efficiency, capitalism ruthlessly pares down excesses - and in a lot of cases that's a good thing!

    The problem with that is that on a macro-economic scale, the jobs that you and I hold are readily made into "excesses" and ruthlessly pared down, and capitalism says "well adapt or die."

    Further, capitalism is easily gamed - once you have enough money, you can do better with rent seeking than you can with innovation, which flips capitalism from efficient allocator of scarce resources into restrictive wealth stripper - which you are seeing right now, and not for the first time.

    It's not a binary scale, where you're either capitalist or socialist. There are certain things we simply don't hold to be a part of the capitalist economy - I don't pay for air, for example - and there are certain other things we've decided to allow to be distributed in a socialist manner - e.g. my water supply is a public delivery system funded with taxes from the population as a whole and delivered equitably to all. I would argue that we've tipped too far into the extreme capitalist side and need to push the pendulum back somewhat with proper regulations - treat banking like a utility, take health care out of the capitalist economy and shift it to the much more equitable (and, if every other developed nation is a guide, more efficient) socialized variant, and so on.

    So long as we live in a system where you need a job in order to make a living, then a job should be a human right. Beyond the economic position - and I think there is a strong case to be made - that's also a matter of basic human decency.

    There is more to life than efficiency.

  • Report this Comment On December 02, 2011, at 3:49 PM, infopackrat wrote:

    mikecart1 displays the #1 problem I see with the stock market. The concept of stocks was created so that people could invest more into a company tha individuals can. After all, even billionaires couldn't start a Boeing rival from scratch just on their own funds. But then we start trading stocks, and it becomes a huge market. And then you get all these mikecart1's of the world who view the stock market as some kind of casino where it's actually possible to beat "the house" through careful study of a company's cash flow. It's this kind of thinking that lead to the demise of several smaller Hollywood studios: Investors would buy the company, sell off all the rights (creating a sudden cash flow), bump up the market value, and then shut the company down. Or today's modern equivalent: make a bunch of risky decisions that make your cash flow look attractive to mikecart1-logic investors, the cry to the government for a bailout when the whole house of cards comes tumbling down. And you wonder why the "Occupy Wallstreet" movement is growing?

  • Report this Comment On December 02, 2011, at 4:09 PM, MikeyWasHere wrote:

    How else can it be explained that there is no cap on interest rates?

    There is

    Why are people thrown in jail because the cannot pay their bills as if that would miraculously put money in their pockets?

    Sorry, no debtors prison here, maybe thats in your country. A debt collector can't even call you a name without breaking the law. All you have to do is tell them you are recording the conversation at the start of the call and most will leave you alone, or at least play nice.

    Why are the people charging interest rates and fees like the mob walking free?

    It's so easy to complain when you don't have a clue what you are talking about.

  • Report this Comment On December 02, 2011, at 5:21 PM, MCCrockett wrote:

    I majored in Economics but have worked as an Engineer since the early Seventies.

    One fundamental problem is that the laws were changed in the Eighties to allow consumer/retail banks to become "one stop" financial institutions.

    Once consumer/retail banks were allowed to merge with investment banks and stock brokerages, there was a shift in focus. Fiduciary responsibilities took backseat to the art of investment and managing risk.

    Once management shifted to those attuned to taking risks, the consumer/retail banking system was in trouble.

  • Report this Comment On December 03, 2011, at 9:19 AM, foolsfrolic wrote:

    Our conservative legislators, Republcans, point out that our tax rates are the highest of the industrialized countries. In response, few people pay them. They are easy to avoid and they also fail to mention that we are the country with the biggest military budget as a percentage of GNP. In short, we need tax revenue.

    Martin G.

  • Report this Comment On December 04, 2011, at 12:08 PM, Benedictine9 wrote:

    "It suddenly occurred to him that our recent financial crisis "didn't occur because of something that banks did. No, it was the natural consequence of the way banks are, even today.""

    Let's just replace a couple of words here.

    It suddenly occurred to him that the recent serial murders "didn't occur because of something that the killer did. No, it was the natural consequence of the way humans are, even today."

    Sorry- not buying the excuses - no way, no how.

  • Report this Comment On December 06, 2011, at 3:07 PM, DJDynamicNC wrote:

    ^^^ Humans respond to incentives. If your system is set up to encourage certain kinds of behaviour, and it's done well, then odds are good that people will respond in just such a manner.

    For example, if you give corporations an unlimited voice in how their own industries are regulated, and you remove or disempower whatever remaining regulations are on the books, and you provide bonuses for bottom-line accounting that doesn't necessarily reflect an accurate picture of the economic landscape, and you fail to hold accountable those who use or abuse such practices, and you promise to bail out those people when reality catches up with them and they go bust using billions of dollars of other people's money... well, that's a lot of incentives pushing banks.

    In short, it's not simply what the banks DID that's the problem. It's the way they ARE, as well.

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