Mike Mayo: How Banking Became An Industry On Steroids In 10 Steps

Mike Mayo: How Banking Became An Industry On Steroids In 10 Steps: "

In his testimony in front of the Financial Crisis Inquiry Commission, analyst Mike Mayo identifies 10 ways 'banks have been on steroids.'

1. Enhanced performance with excessive loan growth. Banks and the financial industry grew loans 10%, while the GDP only grew 5%, thus loan growth was twice the natural rate.
2. Banks pumped up products with higher yielding assets. Low yielding securities and treasuries fell from 32% in the 90s of bank assets to 2%.
3. All the fastest growing loan categories were real estate related.
4. More balance sheet leverage. In the 80s, leverage was 20x. In the last decade it was 40x.
5. Investment banks pumped themselves up with exotic CDO-related derivatives. They also bought 'protection' from the monolines, which turned out to be garbage.
6. Consumers levered up as well.
7. Due to accounting issues, banks stopped setting aside as much for reserves.
8. The FDIC didn't collect any fees for several years ending in 2006 because there was such confidence about the state of the fund.
9. Through the GSEs, the government doled out steroids.
10. Salary incentives have never matched performance. The bonus system has always encouraged excessive risk.

Now read his full testimony.

2010-0113-Mayo(2)