The Price of Being Right Star analyst Mike Mayo thought he could change the ratings game on Wall Street. He thought he could be honest--and tell people to sell stocks that were headed for a meltdown. It cost him his job.
By David Rynecki

(FORTUNE Magazine) – The salesmen were eager. As Mike Mayo began to address the early-morning meeting at Credit Suisse First Boston on May 24, 1999, the crowd seemed unusually perky, pulling to the edge of their seats. Maybe that was because of the recent explosion on Wall Street. After smashing through the unthinkable 10,000 barrier just two months before, the benchmark Dow industrials had everyone from mom-and-pop investors to the big institutions juiced to buy. Or maybe the reason was the man speaking. At the podium was one of CSFB's most celebrated researchers--the No. 1 regional banking analyst in the influential Institutional Investor rankings, someone whose stock picks had averaged a 52% annual gain over the previous four years, and one of the biggest bulls in the sector. There was no question the 36-year-old was respected by peers for his thoughtful analysis. But what had given this energetic, self-assured analyst his most dedicated following was "the call." Back in December 1994, when bank stocks were drearily trudging through a bear market, Mayo saw the bottom near and pointed investors up. Saying the sector had turned a corner and would be propelled by cost savings and merger mania, he shouted "Buy!" across the board. His gutsy move left more established analysts scratching their heads. But the call, it turns out, was as good as money in the bank. Within a month the group's stocks had reversed course. And over the next few years Standard & Poor's bank index would post a total return of 254%.

Now, in the spring of 1999, the time was right for another dose of adrenaline, many salesmen felt, a touch more cheerleading. As for Mayo, all he could feel was the knot in his stomach. Dressed more formally than usual in a freshly pressed dark blue suit, white shirt, and tie, and armed with a thousand-page report analyzing 47 U.S. banks, he leaned forward to speak: "In no uncertain terms," he declared, "sell bank stocks."

The room was silent. The brokers, motionless. Many had never heard anything so bearish come out of the mouth of a colleague, particularly in such a public setting. They were uncertain how to convey this message to their clients at the biggest hedge funds, pension funds, and mutual funds. "Did he really say what I thought he said?" one rep recalls asking another. Mayo himself felt relieved. He left the room after speaking for five minutes, only to be summoned back for more questions. He assured them of his resolve, then again returned to his office and collapsed into a chair.

Nearby, analysts Dave Trone and Brad Ball, who worked as Mayo's research partners, were already placing calls to major clients and fielding questions. Mayo picked up a phone and dialed Fidelity. He explained the call to a portfolio manager, then began contacting ten of the major banks he'd just downgraded, along with another 30 major investors, with a courtesy warning. Much of the same was going on over at the trading desk. Within minutes after the meeting, word had spread across Wall Street. The early reaction was not good. "You don't put a sell on blue chips," one exasperated portfolio manager barked. Cried another: "What's he trying to prove? Doesn't he know you only put a sell on a dog?" Yet another shouted at a sales rep who himself doubted the call, "I can't believe Mayo's doing this. He must be self-destructing."

Many on Wall Street agreed with that assessment. Across town at Warburg Dillon Reed, analyst Thomas Hanley held his own conference call, mocking his rival's downgrade as "Mayo-naise." (Hanley did not return repeated phone calls from FORTUNE.) Still more analysts, including the well-regarded Judah Kraushaar at Merrill Lynch, came to the defense of the banks. Rumors quickly surfaced that a number of trading desks were using photos of Mayo for dartboards. Soon after, CNBC picked up on the grumbling, and reporter Joe Kernan asked satirically, "Do we know whether he was turned down for a car loan?"

No one considered that Mayo might be right.

Indeed, he was right. If his 1994 call identifying the end of the bank slump had been strikingly prescient, his call at the top was the equivalent of hitting a hole in one at the Masters. In his weighty spring report Mayo painted the negative case for banks in sweeping strokes: The merger boom was slowing; efficiencies created by deals were already factored into both earnings and stock prices; many banks were covering up bottom-line weakness with outstretched gains from venture capital, underwriting, and trading; and there was growing evidence of an increase in problem loans. Mayo also hit on another controversial point. The high cost of year 2000-related computer upgrades could stall the sector's growth. On this point he was wrong. Though spending did rise dramatically, Y2K meant little to the banks. But even in error Mayo stood apart. He actually admits he was wrong. On all other counts, his timing was perfect.

Within a month of the call, the sector began a chilling descent, triggered by the interest-rate hikes Mayo had forecast. On Aug. 25, 1999, Bank One issued an earnings warning that chopped one-fourth off the value of the stock--a $15 billion plunge. The immediate culprit was slower growth within its First USA credit card unit. But it was really just the first of what would become a series of missteps related to the 1998 merger of Banc One and First Chicago. On that warning, analysts at Paine Webber, Salomon Smith Barney, and Morgan Stanley Dean Witter lowered their recommendations to either "outperform" or "neutral." Warburg's Hanley also dropped his rating. Privately, Bank One officials were still fuming over Mayo's bearish turn. But by Dec. 21, when the bank had issued another warning and Chairman John McCoy announced his departure, Mayo looked like the oracle of Delphi. The stock had fallen 47% from the top. Even McCoy, who says Mayo was "dead-ass lucky," grudgingly admits the analyst had a point. Says McCoy: "Mayo has strong intellect, and he works hard as hell to understand companies. I respect that."

So did the investors who listened. From its peak on July 7 to the end of 1999, the benchmark S&P bank index sank 21% and closed the year with its worst annual performance relative to the broader market in 54 years. It then continued the tumble through the end of February 2000. "If he hadn't made that sell call, a lot of portfolio managers would have been caught sleeping," says Tom Wynn, manager of the $1 billion Mainstay Convertible fund. Adds Ray Nixon, who manages $4 billion in bank stocks at Barrow Hanley: "That call was one of the reasons Mike Mayo was an analyst I wanted to listen to."

Ironically, the accuracy of Mayo's prophecy seemed to only stir the ire of the various constituencies that felt he had somehow betrayed them. And they gave him hell. Though there were notable exceptions, several large Midwestern and Southeastern banks attempted to cut ties to the analyst. One chief legal counsel at a major regional bank demanded a retraction of the call. The angry CEO of a Tennessee bank told salesmen and investment bankers that he planned to cease all underwriting and trading business with CSFB. A few bank chiefs were equally vocal in phone calls directly to Mayo, chewing him out. Others were subtler in their dissent, simply circulating their opinion that the media-friendly analyst was doing nothing more than reaching for big headlines.

In some cases Mayo didn't even realize the extent of the backlash. On several occasions when the analyst asked to bring an institutional client to sit down with a management team or tag along on the road--a perk granted to many analysts--the banks politely declined. One bank's investor relations manager, who had previously cited the researcher as his favorite, now whispered to large investors that Mayo's judgment was flawed. Harped the executive: "Why should we help an analyst who doesn't understand our story?"

Still, the most punishing lesson was yet to come. On Sept. 28, 2000, shortly after CSFB announced plans to acquire Donaldson Lufkin & Jenrette, Mayo was called into his research director's office, given some fumbling apologies, and fired. The firm also handed pink slips to seven other members of the banking team. By 4 P.M., Mayo had packed up two dozen cardboard boxes and shipped them off to store in a colleague's garage. He's been out of work ever since. "I knew going negative was a risk," he says. "But just like I was unequivocal on the way up, I wanted to be unequivocal on the way down. I never thought I'd be fired if I got it right."

It is hardly a deep, dark secret that the ratings game on Wall Street is beset with serious conflicts. Once kept separate, by long-held convention, from the investment banking side of the business, brokerage house analysts now find themselves in the supporting role of assistant dealmakers. Researchers pull double duty as stock boosters, often serving as liaisons between the companies they cover and the investing public. It is, after all, a game about money. Piles of it. And today the big dollars come from juicy underwriting deals--not from trading commissions, which have fallen steadily over the past decade. That factor has helped turn many high-profile researchers--whose public task, importantly, is still to impartially dissect companies and the financial deals they undertake--into "relationship builders."

To solidify relationships with the companies they cover, of course, analysts have mastered the art of saying "I love you," a phrase that translates roughly on Wall Street into "Your stock is worth buying right now." Even during the uncertain, recession-fearing, shoulder-twitching present, more than 70% of the 27,000 analyst recommendations tracked by First Call/Thomson Financial are buys or strong buys. That compares with a minuscule 1% for sell ratings of any kind. Among the ten largest investment banks (which do the vast majority of underwriting), the pattern is more pronounced. First Call identifies a total of 57 sells vs. 7,033 buys. Grumbles portfolio manager Scott Black, president of Delphi Management: "Some companies have to have terminal cancer before they're pulled off the recommended lists."

But while the rewards for positive coverage are well known--and remain an issue of continuing concern for the Securities and Exchange Commission--it has never been obvious (beyond the top-floor corridors of Wall Street) just how stark the penalties could be for being overtly negative. The Mike Mayo case is instructive for just that reason. If a top-rated, thoroughly respected analyst earning a seven-figure salary with a name-brand firm can take this kind of career hit, Wall Street's legions of lower-profile analysts have little hope of summoning the courage to shout "Sell!" on a given stock or sector. The message to retail investors is sobering: If, in fact, stocks are headed for a disastrous slide, you won't hear it from the researchers paid to predict it.

CSFB would not discuss Mayo. A company spokeswoman issued a statement saying the merger with DLJ "gave us the opportunity to bring on board one of the best financial services teams on the Street." CSFB also emphasized the strong relationship that the team, headed by analyst Susan Roth, had with fund managers. In short, his former bosses maintain, Mayo was not fired for being controversial.

However, in interviews with more than a dozen of Mayo's former colleagues at CSFB, Lehman Brothers, and Union Bank of Switzerland as well as investment bankers, bank executives, and research directors at competing brokerages, that is precisely the impression many were left with. Had he simply played the game, had he been more like other analysts, Mayo feels, he'd still have a job. Citing fears of retribution from their employers, fellow analysts, and clients, most spoke with FORTUNE on condition of anonymity. Notably, even some who were targets of Mayo's sharpest criticism were surprised to find the analyst out of work. As the head of one of the nation's five largest banks marveled, "the son of a bitch knows more about research than anyone I know."

Mayo himself seems to have known deep down that his sell call was going to anger many. Though ranked as one of CSFB's top four analysts when it came to generating commissions from institutional clients (who often pay higher trading fees in exchange for an analyst's insight), he knew the real money had long since moved to the underwriting business. And on that front, few areas of the market were more lucrative to CSFB than financial institutions. In 2000, CSFB and DLJ handled bank-related mergers and acquisitions worth a combined $120 billion. At CSFB, investment banking on the whole generated $2.2 billion in revenues in fiscal 1999, the most recent year available. Research didn't even merit its own line item.

True, analysts had a responsibility to deliver stock-picking advice to their moneyed clients, but there were ways to do that without making waves. For starters, when there was a problem with a public company, you could whisper it to brokers who could then whisper it to clients. You could put some cautionary statement like "There is a potential for volatility" in one of the scores of research reports that investment firms publish every year, or lower an outlandish price target. As a last resort, you could even downgrade a stock to something wishy-washy like "accumulate" or "market neutral," though even that is seldom done. Indeed, you could do almost anything, that is, but actually say the word "sell."

For many analysts, this was simply the cost of doing business. "Think of it this way," says Tom Brown, a former No. 1 banking analyst who says he was fired by DLJ in 1998 for being too negative. "You're making seven figures, and in your heart of hearts you know you're not worth that much. But you don't want to give it up. So why would you ever take the risk of being wrong and pissing someone off?" (CSFB, now merged with DLJ, would not comment on Brown's employment.)

But there was something itching in Mayo to tell the truth--to have research mean something to retail investors who weren't lucky enough to get the private call. "I guess I'm from the Jerry Maguire school of bank stock analysis," he says, referring to the fictional sports agent who decides to take a stand and loses his job for it. "I wanted to show other analysts that making honest, objective calls that benefit all parties works over the longer term. I wanted to make a statement."

"Scrappy" is a word that many would use to describe Mike Mayo. You wouldn't be far off the mark with "opinionated" and even "pushy" and "arrogant," according to some who know him well. But one thing is clear: Mayo has always been sure of himself. After earning an undergraduate degree in mathematics at the University of Maryland--paying his tuition with a three-day-a-week job as a computer programmer and salesman for IBM--and then getting his MBA at George Washington University, Mayo sent dozens of resumes to brokerage houses, looking for an analyst's job. But it was late 1987, the time of the market crash, and no one was hiring. So he turned his sights to Alan Greenspan's Federal Reserve, where he spent five years analyzing mergers in the financial services sector. There he learned to dissect deals in ways that are uncommon on Wall Street. Greenspan was intolerant of hedging. Every report had to answer a single, straightforward question: Should the Fed support the deal or not?

In 1992, after another barrage of desperate cover letters and resumes, Mayo finally landed on Wall Street as a junior banking analyst at UBS. He gained a reputation for crisp, well-thought-out arguments that condensed the case for buying or selling into one- or two-sentence bullets on the company's positives and negatives. But often the nuance-free cases he made annoyed those he criticized. Lee Irving, chief accounting officer at KeyCorp, remembers one report Mayo published in the early 1990s that slammed his firm's acquisition strategy. The chief executive was so outraged, recalls Irving, that he threatened to cut off all business with UBS. Eventually, that CEO resigned amid the very problems that Mayo had forecast.

Shortly after Mayo was hired at Lehman Brothers in 1994, he made his electrifying call about the positive turnaround in the banking sector. Helping to fortify his opinions was an exacting financial model that he had developed for determining the underlying value of a bank's franchise. That model not only appeared to predict whether a stock was cheap or expensive but also pointed to likely takeover targets. Though considered mechanical by some, it worked. In April 1995, for example, Mayo picked Barnett, First Chicago, First Commerce, and Chase as acquisition candidates. Within three years all had done deals.

Shortly after, Institutional Investor called Mayo one of the "biggest bulls" in bank stocks, later ranking him No. 2 in its annual poll, behind DLJ's Tom Brown. At CSFB, an analyst's rank stood for the firm's credibility, Mayo was told. But credible or not, his uncompromising manner struck several colleagues as simple arrogance. Some were particularly annoyed when the firm's star analyst, often with Trone at his side, issued a report arguing that bank executives should be compensated on the basis of their company's stock performance--or when, in November 1999, he singled out Bank of America for sweetening quarterly earnings with one-time gains and nonrecurring revenue. Their reaction, expressed quietly because Mayo was otherwise a steadfast bull, was that he was talking about issues that were none of his business. He paid little attention to criticism of his unconventional style.

When FORTUNE named him as one of the 15 best researchers last July in our inaugural All-Star Analyst rating, Mayo felt he was having a career season. Though regional banks had just come off a terrible year in 1999, Mayo had been one of only three analysts in his sector whose picks recorded an actual gain for the year. While the analyst remained pessimistic about banks in general, he was starting to see some rare opportunities for investors. In late July 2000, for example, he upgraded Mellon and Bank of New York to a "buy." (Both stocks went on to lead the sector through the end of the year.) Soon afterward, the Wall Street Journal ranked him No. 2 in its stock-picking poll, and then Institutional Investor came out with its 2000 ranking. Mayo finished second, behind Goldman Sachs' Lori Appelbaum. In third place was Susan Roth, a relative unknown from DLJ who had been among the analysts to reiterate buys on stocks that Mayo had downgraded in 1999.

Internally, CSFB was having a banner year in financial services transactions, handling deals for Wells Fargo and U.S. Trust, among others. DLJ ranked close behind. But at the latter, say one current and one former employee of the firm, analysts were expected to open doors for the banking team. Veteran dealmaker Richard Barrett, who led the team, had been accused publicly of being behind the firing of Tom Brown in 1998--a charge he later denied. Years earlier, similar accusations had been made surrounding the departure of another outspoken analyst, Charles Peabody, from UBS when Barrett ran the banking group there.

While CSFB would not make Barrett available for comment, it is clear that the firm's banking clients saw absolutely nothing wrong with having an analyst in their corner. "Dick Barrett knew that if we were doing a deal and an analyst didn't recommend our stock, we probably wouldn't use that firm," says one senior bank executive, who has done several deals with Barrett and respects his abilities. "I'm going to hire the firm with the analyst who likes my stock."

How much this sort of analysis figured into CSFB's decision to fire Mayo isn't clear. (CSFB insists that Barrett was not a factor.) In November, Barrett told the industry publication U.S. Banker that Susan Roth was retained over Mayo simply because she was a better analyst. What is certain is that when the CSFB/DLJ merger was announced on Aug. 30, almost no one thought Mike Mayo had a chance--and that wasn't because his picks had been wrong.

Indeed, the one obvious call that Mayo seemed to blow was the one regarding his own career. The evening that news broke about the deal, Trone called Mayo and asked him if the two should start looking for work. "Don't worry, we're safe," Mayo told him, laughing at the suggestion. "Look at the year we've been having!" But as the weeks passed, the two became suspicious. They'd heard rumors that Roth and her group were lobbying hard for the banking slot. As for Barrett's future, that seemed assured: He would assume control of the merged financial institutions group, and with it one of the most powerful moneymaking positions in the firm.

Mayo, too, had a team, but no one interviewed them. When Mayo pressed research director Jack Kirnan and Kirnan's boss Al Jackson, the response was that nothing had been decided. It wasn't until an aggressive headhunter called Trone at the office and told him the DLJ team had contracts in their hands that Mayo finally realized what was happening.

On Sept. 15 he pleaded to Kirnan for information. Kirnan conceded that things did not look good. Mayo threw up his hands, and with them went a stack of papers. He flung a pen across the room. After returning to his office and composing himself, he looked over his calendar for the next day. On the agenda: an 11 a.m. talk with CSFB trainees about, of all things, how to downgrade a stock. Mayo resolved to lobby like the DLJ analysts and also to put up a brave front. He spoke to the trainees the next day, overflowing with emotions as he had back on May 24, 1999. "Look at me," he told the group. "I'm evidence that you can be negative and still survive."

It's a frigid, snowy January evening in Manhattan, and Mayo is sprinting past the doorman of his Upper East Side high-rise and into a Starbucks across the street. "Sorry I'm late," he says, out of breath. "I've been trying to get a meeting with the research director at this one firm, and he wants a writing sample. Can you believe that? I've got to give him a writing sample! It's like I'm back where I was when I started in this business." Although CSFB didn't exactly leave him poor, offering a generous severance package, the top-ranked analyst has been worried about being sidelined from the game too long. And by now Mayo is entering month No. 4 of his unemployment. Several smaller firms had initially expressed interest in hiring a big name to boost their aspiring research units, though none have made an offer. There's also been interest among a variety of hedge funds that tend to value critical research. Among the bulge-bracket firms, however, no one has so much as bitten.

Mayo says he isn't giving up. He just has to be in the game, he confides. When he's playing with his 6-month-old daughter on the living room floor, he finds himself dialing into conference calls. In fact, to stay abreast of the sector, he's been paying his own way to bank conferences in Boston, Charlotte, N.C., and New York. He's also taken investors with him to meet senior management at Wachovia in Winston-Salem, N.C., and SunTrust Banks in Atlanta, two banks he has maintained good relationships with despite his sell call. What's more, there's still plenty to shout about in the banking industry. Fourth-quarter bank earnings are sure to look awful, he insists. Already, Chase and Bank of America have lowered estimates. There is talk, too, of problem loans at several institutions.

But the months of pounding the pavement, of 30 unsuccessful job interviews at a dozen firms, are taking a toll. He's had to swallow hard and call former competitors to inquire about openings. Most have been nice enough about it, with some suggesting that he switch to the "buy side" of Wall Street, working for a mutual or hedge fund. The mere thought of this is enough to raise his hackles. He believes such a career change is equivalent to admitting defeat. What frustrates Mayo even more is the fact that his replacement at CSFB has relaunched coverage of bank stocks with an argument that seems to mirror his own views. Likewise, she's concerned that banks will be vulnerable to soaring corporate bond defaults and a slowdown in loan growth. She's worried about their lackluster revenue and deteriorating credit quality. Indeed, of the 20 big banks she covers, she expects eight to report a decline in fourth-quarter earnings--three of them by more than 30% over the previous year.

That's why there isn't a "sell" among them.