Government FAILURE

Government FAILURE

John Allison was one of the few bankers who spoke out against

the federal bailout of Wall Street. The chairman and chief executive

officer of BB&T explains why he's now participating in the U.S.

Treasury plan and what he plans to do with the extra money.

banking Q&A by Jean Gruss | Editor/Lee-Collier

The recent financial crisis was a result of the failure of government, not capitalism.

John Allison, the chairman and chief executive officer of North Carolina-based Branch Banking & Trust Co., better known as BB&T, says the root cause of the recent financial crisis was the failure of government to rein in mortgage giants Fannie Mae and Freddie Mac. Congress implicitly backed the two agencies when they made billions in loans to people who couldn't repay, causing subsequent problems for the financial industry.

It's worth listening to Allison. Under his tenure, BB&T has become the 14th largest financial-holding company in the U.S., with $137 billion in assets. And he's grown it conservatively, staying away from some of the riskier loans his competitors made during the boom.

To fix the crisis, Allison believes the government should focus on fixing the real estate market, the root cause of the problem. A 10% tax credit for homebuyers would be a good start.

The Review recently caught up with Allison, who was in Fort Myers to speak at Florida Gulf Coast University, where the bank recently gave $600,000 to endow a professorship in free enterprise at the business school. Allison discussed his criticism of the federal bailout plan and why BB&T decided to participate by accepting $3.1 billion in capital from the U.S. Treasury.

The following is a transcript of the conversation, edited for style:

Q: You wrote a letter to Congress in September critical of the Wall Street bailout and then you recently applied for and received $3.1 billion from the government program. What happened?

A: We certainly were unhappy with the way the whole bailout process was handled. We felt that it was an unnecessary crisis and it could have been handled dramatically differently with a much better outcome. And the psychological effect on the economy, you've observed, has been pretty negative. In terms of participating in the capital program, it was made clear from our regulators that they strongly encouraged us to do that. And we always do what our regulators strongly encourage us to do. I wouldn't say we had no option, but they made it clear that's what they wanted us to do. So that's why we're doing it. We had a very strong capital position before the bailout. We had very strong earnings relative to the industry. So we don't really need the money from an ordinary sense of the word, but they want institutions in a position to maybe take over some weaker companies that are having financial troubles. And of course they've strongly encouraged everybody to expand their lending capacities. So we are doing what they've asked us to do.

What are you going to do with the extra capital?

Well, we really haven't got a specific plan today. We are looking for opportunities to grow our lending business and we are certainly going to look at ... bank acquisitions.

What are the opportunities in Florida for acquisitions?

That's a little awkward to answer. There are a number of institutions in Florida that have some challenges because this is a tough market. We're certainly looking at some of these opportunities.

What are you looking for when you make acquisitions?

In this kind of environment, you certainly have to look at the financials of the institution. Then you have to look at the quality of its distribution system and the kind of client relationships and culture it has.

Why make acquisitions when the FDIC is going to close some banks and hand them to you? Could you grow market share that way?

It could be an FDIC-assisted deal. I can't predict that because they don't tell us today. We certainly would look and have looked at FDIC-assisted deals.

What is your strategy in Florida?

Florida's obviously a long-term great growth market. This is a difficult environment today because the real estate market is such a huge factor in Florida, as it has been for many, many years. We're continuing to expand in Florida, de novo, on a cautious basis. We plan to grow significantly in Florida when the opportunity presents itself.

What signs will your bank look for to significantly expand in Florida?

Obviously, you might have an opportunity just because of what's going on with what the FDIC provides you. But independent of specific opportunities, I think the thing we would look for would be having some feeling that the real estate market has bottomed.

Are we near the bottom in real estate in Florida?

Before the recent events and before the psychological effect of how all this stuff has been handled, we felt fairly clearly that real estate would bottom next spring and we'd start seeing a recovery by next summer. How much the psychological effect of the financial situation is going to have on the markets is a difficult thing for me to predict. So it's a tougher guess right now. But I still think we'll likely see the bottom next spring.

The banking landscape has changed so much in the last few weeks, how does BB&T fit in?

We have had dramatic change in 90 days. We've always believed that if we ran a really good company that provides superior value to our clients, we could compete with anybody. We've long competed with much bigger institutions - the Wachovias and the Bank of Americas - for many years very successfully. We have a different value proposition. We operate as a series of community banks with local decision-making. However, we think we're better than community banks because we have the resources of a larger organization, better trained-people, and better technology. We're benefiting pretty successfully from the Wachovia situation. We've had a very nice movement of both borrowers and depositors. There are scale advantages in our business, but there's no evidence they go beyond $100 billion to $150 billion. A lot of the bigger companies are having some of the biggest problems. In a lot of markets, we're the dominant player. In North Carolina and Virginia, we have the No. 2 market share.

Do you hope BB&T will achieve a similar scale in Florida?

I don't think we can be on that scale across the whole state. But we think in certain markets we've targeted, such as Southwest Florida, from Tampa-St. Pete area down to the Fort Myers area, we think we can get substantial scale and be very efficient. Florida is a huge state. Because we operate as community banks, we focus around the community bank operating area.

Speaking with your customers in small to medium-sized businesses, what are they telling you about the economy?

Most of them are concerned about the economic environment. There are not many segments that aren't struggling. Anything that is capital intensive - if it's related to homes, automobiles - those bigger ticket items, those sales are very slow. It's a tough market. It's hard to guess when consumers are going to be willing to get back into the marketplace. One of the interesting issues is there's concern about the availability of finance, but we have a lot of money to lend. But a lot of people don't want to borrow.

So it's not a question of liquidity but a lack of credit-worthy borrowers?

That's exactly right. A lot of people have overextended.

In your letter to Congress, you suggested one of the remedies should be to help homeowners directly.

I am stunned that they haven't gone to fix the real estate market. All the money they've spent, they haven't targeted the real estate market, which is the fundamental problem. What I proposed was a 10% tax credit and the idea was to get real estate moving again. For the average person, their home is a special asset. When you're concerned about the value of your home, it impacts your whole psychology. It's really discouraging that Congress hasn't done something. Helping people to keep from being foreclosed may be good but it isn't going to fix the real estate market. What you've got to do is attract people to buy real estate right now. I'm surprised a Florida congressman hasn't proposed this, but a 10% tax credit may encourage someone from New England that's going to retire in five years to go ahead and buy the house now and then rent it out. What it would do is stabilize the market. The real problem is clearing the inventory in the market. I'd sure take a shot at a 10% credit on housing versus anything they'd propose.

Back to the bailout program, you're going to have U.S. Congressman Barney Frank telling you how to run your bank. How do you feel about that?

If we had had our druthers, obviously we'd rather it had never existed. But once it existed, our competitors were getting the money and the regulators were telling us to do it. We hate that it exists. It is terrifying, if you want to know the truth. And [Congress] might do things that sound good that are very destructive. They have a history of that. It is disappointing to me too that the fundamental cause of the problem has been misidentified and that's really government policy, especially Freddie Mac and Fannie Mae and the affordable housing program. Freddie Mac and Fannie Mae, when they went down, their liabilities were $5 trillion. And Congress made that mess. It's interesting to me that Congress doesn't take responsibility. Affordable housing is what created the bubble. That overwhelms the mistakes that the Merrill Lynches of the world made. It's a shame they haven't owned up and taken responsibility. They created the [mortgage] broker system, because brokers were feeding Freddie Mac and Fannie Mae.

So what should happen the Freddie Mac and Fannie Mae?

They can't get rid of them in the middle of a crisis. It's not practical. But as soon as the crisis is over they should privatize them or just liquidate them. What you really need is for banks to hold loans. When you make the loan you understand the risk. When you disconnect the origination of the sale, it doesn't work. Freddie Mac and Fannie Mae basically drove all the other people out of that business because if you have a government guarantee, how do you compete?

What advice do you have for the new Treasury secretary?

I really think that the first thing they need to do is quit popping out programs left and right. They have too many programs, too complex. What they really ought to be doing is sponsoring something to deal with the real estate markets, creating a bottom. I think once that happens the rest of the economy will turn.

What do you hope BB&T's $600,000 gift will accomplish at Florida Gulf Coast University?

We sponsor now a number of programs at colleges and universities throughout our footprint. The basic theme of the program is that many people realize that over the long term, capitalism produces a higher standard of living. Capitalism is perceived as either immoral or amoral. We think capitalism is a moral system, which is why it works long term. Our programs are really about the moral foundations of capitalism. So it's important to have a discussion in the academic community about that.

Especially now, right?

This is one thing that's discouraging. Obviously some individual companies make mistakes, but this is being presented as a failure of capitalism. I think it's a primarily a failure of government policy. That whole story needs to be heard to really comprehend what's happened.

REVIEW SUMMARY

Executive. John Allison

Company. BB&T

Key. A recovery in real estate will lead renewed economic expansion.