The maverick of Wall Street now has skin in the game.

Mike Mayo has been many things in his two decade-long career analyzing the U.S.'s biggest banks: an outsider battling for recognition; a risk taker (in 1999, he placed a sell rating on the entire U.S. banking sector, a gesture that catapulted him into the limelight); a regular fixture on the industry roll calls of star analysts; and a Wall Street nomad, with stints working at many of the industry's big firms, including UBS, Lehman Brothers, Prudential Securities and Deutsche Bank AG. Mayo has been an insistent, buzzing menace in the ear of banking kingpins -- his spats with JPMorgan Chase & Co. CEO Jamie Dimon (2006) and former Citigroup Inc. CEO Vikram Pandit (2010) ranking as news events in their own right. He's also been unemployed ( Credit Suisse First Boston fired him in 2000) and, most consistently, he has been a committed contrarian sought out by investors and the media for his independent perspectives.

Now, for the first time, Mayo has become something he admitted nudges him dangerously close to a conflict of interest: a shareholder in the very banks he analyzes. On Jan. 9, following what Mayo describes as a strenuous and lengthy approval process, CLSA -- the firm that employs Mayo these days -- gave him the go-ahead to buy 100 shares in each of Citigroup, Morgan Stanley and State Street Corp. Mayo has buy ratings on all three stocks; in the case of the first two banks, a recent reversal after five years of negative or neutral recommendations.

"I think it's the logical extension of what I've done in my career," Mayo said. "I think the point where the investors, the checks and balances, meet the management is at the annual meetings. So now I've bought my 300 shares, I can speak at these annual meetings and see how it's supposed to work. ... It's time for the investors to step up to the plate and do their job."

Mayo's move comes amid a surge of shareholder activism, with groups such as Trillium Asset Management, Trian Fund Management and Daniel Loeb's Third Point LLC pressuring bank executives for more transparency, better returns and a closer alignment of pay with performance. (Like Mayo, Loeb himself has recently gone long on Morgan Stanley -- the market's reaction to the announcement earlier this month of 1,600 job cuts may illustrate early wisdom.)

Few would expect a banking analyst to wade into activist waters, especially given the fraught, tech bubble-era history of relations between Wall Street analysts and the investment banking arms of the institutions they work for (which led to former New York Attorney General Eliot Spitzer's "global settlement" of 2003 and the construction of the Chinese walls that remain, at least in name, at U.S. investment banks).

Mayo is aware of the perils of what he's doing, but maintains that with appropriate disclosures in place stock ownership will offer an additional avenue for his brand of analysis to be more effective for investors. With an occasionally abrasive personality, Mayo has found himself frozen out of some of the bigger banks, with limited access to information and decision makers. The way he presents it, having the ability to show up at annual meetings and be guaranteed an audience will help, not hinder, his cause.

"I've been covering these companies for two decades, I've dug through this, I've heard their stories of the great successes they've achieved, and I've seen the results," he said. "So time is out. Show me a credible plan for improving my returns on equity, or do something else."

Mayo was in his office recently in midtown Manhattan, ostensibly with the objective of discussing his recent book, "Exile on Wall Street: One Analyst's Fight to Save the Big Banks From Themselves." For a book -- and a career -- with such grand, Rolling Stones-alluding ambitions, his opening gambit was endearingly modest. He was absent-mindedly munching on a snack at his desk. "Would you like a Clif Bar?" he asked. "It's cookies 'n cream."

Over the next hour, a broad-ranging discussion on banking unfolded with Mayo and The Daily Deal's Wall Street reporter Aaron Timms.

The Daily Deal: We'll start with the big news of the month: the $20 billion U.S. banks will have to pay in settlements over home loans left over from years leading up to the financial crisis, with Bank of America's $10 billion at the heart of it. Does this mean the ghosts of Angelo Mozilo and the subprime debacle have now been put to rest, or do you expect legacy issues to continue to plague Wall Street?

Mike Mayo: The biggest legacy issue is to ensure that banks are strong enough to withstand the next downturn, and that's a function of a lot more than simply resolving the old mortgage issues -- and in fact, the old mortgage issues still aren't fully resolved, even with the [recent settlements]. Resolving the foreclosure issue certainly helps; Bank of America resolving the Fannie Mae issue certainly helps. But Bank of America in particular still has issues with MBIA monolines, private-label underwriters, where the litigation is likely to continue for years. The bigger question is how much more oversight will regulators require? There's been a good start with higher capital requirements for banks; less leverage is obviously a good thing. Before the financial crisis, leverage in the banking industry was at a 25-year [high] -- again, this was before the crisis! That's ridiculous, and we wrote about it, but no one seemed to pay attention until after the fact. So at least that part of regulation and oversight is on the mend. You also saw this week that there's been a relaxation of [the timetable for banks to meet] liquidity requirements [under Basel III]. ... So overall, I think the industry is certainly on the mend after four years; capital has doubled, liquidity is 50% higher at some of the [big] banks, they've gotten rid of some of the bad activities, some of the bad actors are off The Street. That's all good, but it still begs the question: Are banks going to do it all again, and are incentives in place to prevent them from doing it again? You can jerry-rig the system and put in all kinds of rules, but at the end of the day, are individuals and their companies still incentivized to take outsized risks for outsized pay in a way that their pay checks will be cashed and they'll be long gone when the problems hit?

And the answer?

And the answer is yes. The incentives on Wall Street are still completely out of whack.

There's a big move under way toward downsizing the larger banks: reductions in head count, divestitures of underperforming units, and so on. Who do you think has done this well so far?

A watershed restructuring is taking place in the banking industry, and it's not in the United States: It's UBS [in Switzerland]. UBS is cutting one-tenth of costs, one-third of assets, and up to 90% of its fixed-income operations. That's a watershed event, and that sets the bar higher for all the other banks that are looking to do something similar. My immediate thought is that Citigroup could be next.

You've long had a torrid relationship with Citigroup, a bank you once described as the "Zelig of financial recklessness." Recently you've turned more bullish. How do you feel about the leadership of Mike Corbat after his first three or so months on the job? Do you think the culture will really change, or is the new Citi the same as the old Citi, destined to repeat the same mistakes and perpetuate the boom-bust cycle that has characterized its history?

Citigroup announced in December that it's cutting 2% of costs, and that's a good start, but it's not enough. The question is: How much more will they do? Will they go as far as UBS? I think the total cost cuts will be meaningfully higher than 2% once the dust settles, but how aggressive they will be remains to be seen. Still, if they go in hard, it has the potential to be the biggest restructuring in Citigroup's history. I think the pressure is on [Corbat] to do something before the annual meeting April 16. Last year Citi was embarrassed with the negative say-on-pay vote [in April 2012, a majority of Citigroup shareholders voted down the proposed pay package for senior executives]. Citi does not want to be embarrassed again. Right now, there is an activist shareholder group, Trillium Asset Management, which has a referendum that requires Citigroup to analyze the possibility of breaking up the company and [report] back to shareholders. Does Citigroup really want to get to its annual meeting on April 16 and have this put to a vote without having done something on its own? I think they would rather be in greater control of their destiny. So if Citi does cut deeper and deepen their commitment to restructuring, they'll need to do it before April 16. In the case of many of the other universal banks, a similar downsizing probably needs to happen.

Which banks, what specific units do you expect to see that happen?

Citigroup is retreating from six of the 40 countries where it does consumer banking. In the case of Morgan Stanley, I think it should be downsizing fixed income more aggressively. Bank of America should consider selling off Merrill Lynch. JPMorgan should consider selling off asset management. I call it doing a UBS. People say, "Oh, does that mean everyone else should get rid of fixed income [as UBS is doing]?" No. Everyone should know where they make money and where they lose money, and the areas where they lose money or don't make an acceptable return, they should figure out how they're going to fix it, downsize it, or sell it.

Based on history, what will downsizing do to bank valuations?

I think it has the potential to be very positive, because when we look at the big banks, there's a lot of hidden value not reflected in book value. To the extent that they sell off some of these pockets of hidden value, that [fact] should become more obvious to investors, who are likely to bid up the stock prices. If you look back over the last 10 to 15 years, since the largest banks came into their own and formed as universal banks, they have all underperformed on efficiency, they have worse revenue growth, their earnings are more volatile, they have worse ROEs, worse ROAs, worse transparency, worse compensation relative to performance, worse stock price performance, and worse valuations. So if you put all of that together, are there any questions? There's only one question after that, and that is: What are we going to do about it? What are we as investors going to do about it? What are you, the banks, going to do to improve my efficiency? What are you going to do to improve my returns? Why are you giving my CEO $30 million when my stock price has been cut in half over the last five to 10 years? So the challenge for banks is this: Either have a credible roadmap on how you're going to improve your ROE -- and UBS looks to double ROE to 15% by 2015 -- or rip the guts out of the companies, spin off, restructure as a way to capture those hidden values for investors today. Those are the two paths.

Do you see credible paths being laid beyond UBS, or will most of the banks have to go the slash-and-burn route?

Not all banks are in the same category as UBS. Wells Fargo, for instance, has had a successful model for a couple of decades, with strategic and management stability, cross selling, and so on. So there's no issue like that for a Wells Fargo. On the other hand, it's yet to be seen how the universal banks will lay out their roadmaps. It's been enough time already. They always say, "Give us more time." But time's out. It's time for action. And you've seen activism at Citigroup, with Trillium Asset Management; you've seen activism at State Street, with Trian [Nelson Peltz's investment firm]. And there's not one institutional investor who owns Morgan Stanley that I've spoken with who disagrees with my assertion that they should downsize fixed income more aggressively.

So Mike Mayo is turning into an activist shareholder.

Whatever you want to call me, now I really can go to the meetings and say, "What are you doing with my money?" I cover these companies and now I have ownership in them, too, which, as I'm sure you can appreciate, is extremely difficult to do. I had to get all sorts of approvals. But I only bought 100 shares each, which I thought was the minimum I need to get to these annual meetings. I support the proposal by Trillium Asset Management that would require Citigroup to analyze breaking up the company and report back -- who can disagree with that? Find me that person that disagrees; they're wrong. I've been covering these companies for two decades, I've dug through this, I've heard their stories of the great successes they've achieved, and I've seen the results. So time is out. Show me a credible plan for improving my returns on equity, or do something else.

I want to explore your idea that time is out. We're four years from the eruption of the crisis. Why do you think it's taken so long for downsizing need to set in? Is it simply that the reality of chronically slow growth has only become apparent?

I think three themes are taking place. One is what I would call a Japan-lite environment, where the U.S. banks are going through a lighter version of what's happened in Japan [over the past 20 years]. There's a greater realization that revenue growth is simply going to muddle along, so if you don't get that growth through the top line, the only way you can protect the bottom line is through more aggressive restructuring.

Many people were expecting a V-shaped recovery ...

Right. Newsflash: no V-shaped recovery. And along those lines, at least balance sheets have stabilized, so you don't have to worry about survival anymore; now it's about sustainability of operations, so people are focused on that. The second part is cheap stocks. Bank stocks have lagged over the last three, five years. So there's a realization that balance sheets are stable, which means that some of these stocks are very inexpensive. The third factor would be shareholder activism, whereby shareholders are no longer sitting on their hands; they're more apt to speak up. So the intersection of a muddle-along Japan-lite environment, cheap [bank] stocks, and more shareholder activism is leading to more pressure to restructure these banks.

So is the great retrenchment a cyclical or a secular trend? Do you think we are seeing the start of a sustainable, long-term shift to smaller "big" banks, perhaps even a voluntary return to a Glass-Steagall-style separation of deposit-takers from investment banks, or will the appetite for more risk, more people, more loans and more services at the heart of the universal banking model return once the banks ride out this most recent downturn and the macro environment improves?

There's always a risk that this kind of thing is cyclical, but it needs to be structural for people to get the message. But this can be win-win for the banks. Banks are not exceeding their cost of capital; in other words, returns are not above what it costs for them to stay in business. What are the routes banks have historically taken to increase their cost of capital? They've increased returns. How did they do that? In the 1980s, you had the Latin America debt bubble, in the early 1990s, you had the commercial real estate bubble, in 2000, you had the technology bubble, and in 2007 you had the housing bubble. As opposed to putting the pedal to the metal, and trying to goose returns too much, how about reducing the cost of capital, reducing the cost of doing business? You do that by having stronger balance sheets with more predictable earning streams, so that nobody worries if the bank is going to be there from one day to the next. My hope is that there will be a structural change, whereby banking returns to the way it was in the 1950s and 1960s. That might not be sexy, it might not have a whole lot of sizzle, but it's a lot more predictable, so that even with slower growth, [bank] stock prices can still go up, because the risk is so much smaller.

If we are, as you say, at the beginning of a "Japan-lite muddle-along scenario," what do banks do once downsizing has run its course? If you do all these things to reduce the cost of capital, reduce head count, sell the underperforming units off, and so on, what strategy will be behind the next wave of growth?

I think the ideal scenario is that you just go back to boring banking. That's going to be a lot less growth-y than [banking] was in the past. Revenue growth over the last four decades has gone from 12% to 10% to 8% to 6%, and this decade it's likely to be 3 or 4%. If you [go back to the way banking was in the 1960s], that's a big improvement from where we are now. There's not a whole lot of sexiness there, but I'm not sure you want your banks to be real sexy. You want your banks to be predictable, and I think you want your banks to have utility-like returns -- not be managed like utilities, but you want the end result to be utility-like.

And what should that result look like, in terms of returns?

You're talking maybe if you grow 7% a year, but you keep doing that for 10 years straight, then that's great. And then banks [in that environment could] return a lot more of their capital, because they don't need it for the business. So, like any mature industry, you'd see slower growth, hopefully more predictable growth than it's been, and you'd return a lot of the earnings to the shareholders through dividends and share buybacks.

Commercial banking M&A has been in the doldrums for much of the past year. What's the outlook for the coming year in your view?

I think first of what could go wrong. I think we could have another commercial credit cycle; people get very complacent with that. And I also think interest rate risk could be the big unexpected blow-up in the industry over the next five years. So those are things to watch. When I think of what could go right, we could be on the verge of a big deal cycle [in the broader economy], because we've had such pent-up demand that hasn't been able to be realized because of all the macro issues. But once that pent-up demand gets released, you could have a deal wave. You could call it the three Es. One is the election: it's over. The other E is Europe, which seems a little more stabilized. And the third E is the economy, at least with the fiscal cliff, which we got past. We're not done yet [on the economy], but assuming you finalize getting past the debt ceiling and all those issues, if you're a CEO and you've been waiting a few years to do a deal, what are you waiting for now? I'm going to quote the CEO of PNC [Financial Services Group Inc., Jim Rohr], who says that the average tenure of a Fortune 500 CEO is seven years or so, and you're going to have one major strategic move during that time; over the last five years, you haven't done much. So if you're going to do a major strategic move as a CEO and you've been thinking about it, once those three Es are resolved, if not now, then when? I certainly could be wrong about this on traditional banks; I'm more negative on traditional banks, because of the commercial credit cycle and interest rate risk. But where I could be more right is on the deal cycle truly getting a lot more active; you saw that just recently with the New York Stock Exchange [being bought by IntercontinentalExchange Inc.].

So the deal cycle you think that might be ahead won't really focus on the banks.

Not so much on the banks, no. I'm talking about industry at large. A lot of the banks trade at a discount to their franchise values, or their sum-of-the-parts value. Morgan Stanley and Citigroup trade at almost half of their sum-of-the-parts value. People say, "How are banks going to realize that value?" In the 1990s, the answer was consolidation. Today, in the banking industry, the way that you might realize some of that value is through de-consolidation. So you have the potential for three decades of consolidation to reverse itself, to some degree. While there are many dealmakers around, there can be just as many people to take apart some of these deals. And it's not even really taking apart the deals -- these [bank] mergers make sense in certain ways, but not in other ways. So if you're combining two big banks, you have a national branch footprint and that's fantastic. But as far as the investment bank is concerned, maybe you need to downsize that part.

You've long been a critic of executive compensation at the big banks. Last year was a bad year for bonuses and this year is not expected to be much better. Are we starting to see the return to a world where CEO pay is better aligned with performance, or are we still in the bubble world where if you're the head of a big bank, you get a big bonus and a big salary regardless of the returns?

If you're the head of a big bank, you still get a big bonus, you still get a big salary. That's just the way it's jerry-rigged. Nothing's changed. But I think the solution here is not for regulators to have a heavy hand; I think the solution is for investors to speak up. And that's why I want to go the annual meetings of some of these banks; I really would like to ask the director in charge of the compensation at each of these banks to explain how the top managers are incentivized to create long-term value.

It's almost like it's become personal for you.

I think it's the logical extension of what I've done in my career. I went up against some banks and said, "This doesn't look right." And I really just went at it as if in a vacuum, based on what I learned in my CFA and MBA [courses]; it was, "Well, this isn't what they taught us, so why are you guys doing it?" It was as simple as that. And they kept doing it, and then I testified to Congress and they kept doing it, and then we had the financial crisis and they kept doing it, and they keep doing it today. So now, I think the point where the investors, the checks and balances, meet the management is at the annual meetings. So now I've bought my 300 shares, so I can speak at these annual meetings and see how it's supposed to work. At first I was embarrassed to admit I'd never been to an annual meeting, but then I talked to a lot of other investors, and they said, "Well, we haven't been to one either." It's time for investors to step up to the plate and do their job. The only regret I have is that I can't buy shares or go to meetings of companies I don't recommend [with a buy rating], so I can only take stocks in three companies [Citigroup, Morgan Stanley, and State Street].

The toothlessness and incompetence of regulators is a theme to which you return, often and with relish, in your book. At one point, you write, "Agencies compete for banks to gain more power, prestige, and relevance -- they try to make themselves appealing by offering a friendlier process and less stringent rules." Is that still true? Between all the regulatory sanctions we've seen, aren't we now seeing a shift to more muscular regulation?

I think we're hard wiring in safer banks with some of the new rules, especially with less leverage and with [the Volcker Rule]. I think regulators have sent a message that they're not going to be pushed around.

I want to come back to the relaxation you mentioned earlier of the liquidity coverage ratios for banks under Basel III. Is the relaxation a prudent reaction to economic reality, or have regulators simply caved? In an environment where growth is chronically slow and loan demand weak, is there a danger that regulators can now turn too soft, and that the growth imperative will trump the austerity and "purity" of regulation?

I don't think the regulators will cave into the industry the way they did before. After a hurricane, everyone bolts their windows for the next hurricane. So I don't think that's too much of a concern. On the other hand, the biggest banks are 2 trillion [dollars] in assets, 20 times larger than 25 years go. If you just look at the three or four largest banks, their combined value is around $7 trillion, that's kind of like half the GDP of the entire country. They have enormous influence and clout. ... That's a lot of political sway, and that's not going away. But in the short term, regulators are going to be tougher. But the moves this week aren't a concern. There are many things in the industry I have concerns with; the stuff this week is simply making liquidity requirements a little less tough than they were going to be. They weren't as workable before, and I never expected them to be implemented in that form. The best regulation is when you hard wire it in [so] you're not as people dependent.

One final question: How has the business of analyzing banks changed over the 20 or so years you've been involved in it? One thing you talk about in the book is that a lot of banking analysts are basically sycophants.

They're what?

They're sycophants.

What?

Sycophants. They're too cozy with the industry.

What phants? I still don't know what you're saying.

Sycophants. They're lickspittles. They suck up.

OK. But what's your term?

Sycophant.

Sycophant -- is that Australian? [The Daily Deal's Aaron Timms is Australian.]

No, it's Greek.

OK, I get it. Sometimes, I just say, "Look, I do a different job from other [analysts]. The end-user will decide who they want to use for what."

Sure, but do you think that's changed over the past two decades?

No, no. Sometimes I can't believe what I hear. I just tell our team [of analysts at CLSA], "We have a different career." But look, if you're managing money, you're probably going to want to talk to three people. And one [analyst] is going to be the person who's super-close to the company, and that might be the cheerleader, and they'll be able to tell you where the CEO goes for vacation, and what the CFO ate for breakfast. And that's one person to talk to for certain reasons. And another [analyst] might have great models, because the company spoon-feeds them all sorts of details; it's not necessarily material information, but it fills in the blanks, and they become the expert on that. And then there's the [analyst] who's independent. So I'm the independent one, I'm doing the job the way I think I'm supposed to do it, but if the end-user wants a particular model or wants to know where the CEO goes on vacation, they have two other people to talk to. But hopefully I'm their independent voice. That hasn't changed.

In the book, you speak about the need to move to a "better" version of capitalism, in which boards and investors, analysts and regulators exercise stronger oversight of the banking industry. How far along the road to that world do you think we are?

Not very far. And that's why -- and maybe it's a cliché -- I say, "Be the change you want to see." So I'll go to the annual meetings this year and we'll see what happens. This is the first time I've ever bought stock in any companies I cover; I've always considered that a conflict. In this case, I'm disclosing that; I don't intend it to be a conflict. The sole purpose is so that I can go the annual meetings and drill some of the directors at these banks on the incentives that are created by compensation for the top people at the firm.