Banker Hypocrisy

TW: This piece frames the relative hypocrisy of many business folks their mantra is simple: if something goes wrong it is the government's fault, if something goes right it is due to their own brilliance. Ironic coming from a banker. And somehow this banker survived the government's malevolence whilst his poor competitors did not. An on-going theme now is to give the Fed and the government no credit for averting a catastrophe whilst accepting little or no personal responsibility for the crisis. Again ironic coming from those who constantly get all righteous about various forms of personal responsibility.

Anyone who spouts Ayn Rand is immediately dubious in my eyes. Many of my contemporaries came of age reading Rand during the Reagan administration, I fear they have been scarred for life especially as many of them did not read more than one or two books total the entire time I knew them.

From Economist:
"...the latest guest is John Allison, CEO of BB&T a regional American bank. Mr Allison is hard-core devotee of the work of Ayn Rand, and consequently, the interview is not very interesting. His answer to basically every question asked is: the government did it. Like so:

Question: What bank regulatory mechanisms, if any, might have prevented the crises?
John Allison: In my opinion, the crisis was primarily created by government policies, specifically the Federal Reserve putting in too much money under Greenspan where we had negative real interest rates for two years. And then Bernanke inverted interest rates, which created terrible pressure on bank margins. We couldn’t have had a bubble in the economy if the Fed hadn’t printed too much money. It ended up in the housing market because of Freddie Mac and Fannie Mae, these two giant government sponsored enterprises. So it wasn’t really the regulatory structure that created the problems, it was government policy from the Fed and through Freddie Mac and Fannie Mae.

This is wrong in many different ways. First, the suggestion that a bubble was impossible without a complicit Fed is absurd; Mr Greenspan was holding rates low to clean up after a bubble that had just popped, which inflated in an environment of high Fed rates. Secondly, low rates or no, America was running a massive trade deficit with China and a huge petroleum deficit with oil exporters, the flipside of which was a capital account surplus. Other countries were purchasing huge amounts of American debt, including gobs of mortgage debt. Mr Greenspan might have raised the fed funds rate high enough to deflate the rising housing bubble, but only at the cost of a severe recession. The whole of the blame for the money pouring into housing cannot be pinned on the American government.

Meanwhile, the definition of a subprime loan is one which cannot be guaranteed by Fannie Mae and Freddie Mac. The story of the massive growth in subprime originations in the latter stages of the bubble is the story of growth in non-agency mortgage lending. Fannie and Freddie did begin purchasing mortgage debt originated by other lenders, which did free up capital for additional mortgage lending, but it's just not right to say that the government is responsible for the housing bubble.

And Mr Allison essentially acknowledges this fact just a few minutes later:

Question: What was responsible for BB&T’s relative success and why weren’t other banks so fortunate?

John Allison: Well, BB&T certainly, we’ve had our challenges and we always have made mistakes, but we have done much better than other financial institutions and I primarily think it’s because of the value system we have at BB&T. We’ve had some good strategies and good execution, but they are very secondary to the fact that we were very much a principal driven organization. We’ve had a very strong culture around ethics and values for a long period of time and we’ve reinforced that over and over again. And that value system is based on rationality, which demands honesty, demands integrity, demands a long-term perspective on your business...

Interestingly enough, our value system kept us from making the negative amortization or what are the pick-a-payment mortgages. I remember pick-a-payment mortgages where somebody buys a house and their interest is $1,000 a month, but they only pay $500 a month. We chose not to do those kind of mortgages, not over some grand insight, because at the time, you could sell them in the secondary market, but because one of the fundamental commitments in our mission is to help our clients achieve economic success and financial security. We expect to make a profit doing it, but we don’t consciously want to ever do anything that’s bad for our clients. We knew real estate markets wouldn’t appreciate a 10% a year forever, we didn’t except them to depreciate like they had, but we knew that people would be taking an inordinate risk with those pick-a-payment mortgages and we chose not to do them over ethics, not over economics. So BB&T’s strength, I believe, has been its value system.

Mr Allison credits BB&T's relatively good performance through the crisis with its policy of not doing dumb, irresponsible, excessively risky, or unethical things. But if BB&T were free to not be stupid and unethical, then surely other financial institutions were as well. But, he implies, they opted not to follow that path, and as a result they suffered big losses, which triggered the broader financial crisis. Thus Mr Allison argues that the crisis stemmed from poor decisions made by his competitors.

As much as I support that conclusion, I'm forced to rethink it by Mr Allison's later espousal of a return to a gold standard and an elimination of deposit insurance. That is, he very much wants to reverse the main policy changes that prevented this recession from turning into the Great Depression."
http://www.economist.com/blogs/freeexchange/2009/12/pointing_the_finger