Tags: Allison | free | market | banks

Cato’s Allison Promotes Book on Free-Market Solutions in Banking

By    |   Thursday, 06 December 2012 03:11 PM

John Allison, former CEO of BB&T bank and current president of the Cato Institute, made his second presentation on his book titled “The Financial Crisis and the Free Market Cure.” The program was part of the American Enterprise Institute’s Culture of Competition CEO Series.

Allison was introduced by Arthur Brooks, CEO of AEI. In his introduction, Brooks decried the movement of the United States toward a European-style social democracy.

As he began his speech, Allison added to this the prevalence of “crony capitalism,” the ability of business people to leverage their connections with government to improve their relative position and put competitors at a disadvantage.

Much of the presentation was the story of how Allison worked to inculcate the culture of objectivism within BB&T, giving copies of Atlas Shrugged to all new employees.

He recounted that BB&T has refused to finance development projects based on the doctrine of eminent domain. Allison singled out Costco as the worst offender in aggressively using this method of acquiring property to build its warehouses. Another program the bank eschewed was subprime home lending, and Allison credited his staff for reaching that decision based on the bank’s internal culture.

With regard to the Troubled Asset Relief Program, Allison stated that BB&T opposed the program but was forced to take the money because the authorities needed to get some healthy banks into the program, which was really intended to bail out three of the largest banks. He singled out Citibank as a bank that hired very intelligent employees to run a subprime business that helped run the bank into the ground. He remarked several times that when companies engage in crony capitalism, it usually does not work to their long-term benefit.

Other government programs Allison spoke of were FDIC insurance, the Federal Reserve, the Affordable Housing program and the Community Reinvestment Act. He called the Fed “a political organization.” Allison also railed at Basel III capital standards, which he called an example of applying the European model to the United States and blamed for assigning only a half-risk weight to housing loans.

He criticized U.S. regulators for imposing on banks like BB&T that had sound internal systems the models that are being used by the largest banks that are in the greatest difficulty.

Allison directed some of his most trenchant remarks at the Dodd-Frank Act, of which he proclaimed the industry would be willing to trade off a lot to get rid of. In his view, Dodd-Frank stands for the “nationalization” of the U.S. banking system. The application of Basel III and other capital standards prescribed by Dodd-Frank, in his view, will lead to the allocation of capital to politically favored products, such as those deemed by the new Consumer Financial Protection Bureau (CFPB) to be beneficial to consumers. He predicted that the result will be to drive community banks out of business due to the mandates of Dodd-Frank and the flattening of the yield curve.

Allison also criticized the regulators for seeking to apply capital standards according to the philosophy of Dodd-Frank that banks need to augment their capital. (Implicitly this raises the issue of the dichotomy between the “regulatory capital” under which banks operate and what their actual tangible capital would be under objective accounting standards of either generally accepted accounting principles or International Financial Reporting Standards.)

While it was evident that the audience was very friendly toward Allison — it laughed heartily at his quips directed at regulators, other banks and companies, such as Microsoft, which Allison singled out as having avoided lobbying but then committed significant resources to it even as its stock performance stagnated — there was a slight undertone of skepticism that the banking industry is the place to pursue a career consistent with free-market principles.

Whenever Allison anticipated or detected this, he would say that he wanted to make a living and stay out of jail, so he had to bend to the dictates of regulators “who have a gun pointed at you.”

You can make your own assessments of the tenor of the relationship between business and government, and future programs should offer more opportunities to consider how this will evolve as the authorities attempt to manage an economic recovery backed by a high degree of federal intervention.

Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.

Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.

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John Allison, former CEO of BB&T bank and current president of the Cato Institute, made his second presentation on his book titled “The Financial Crisis and the Free Market Cure.” The program was part of the American Enterprise Institute’s Culture of Competition CEO Series.
Thursday, 06 December 2012 03:11 PM
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