Randian Bankers Are Great Accountants

December 6th, 2011 at 3:42 pm | 35 Comments |

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Noah asks in his post whether one could trust a Randian banker.

By coincidence, I read Noah’s post on John Allison while I was in the middle of reading Donald Luskin’s through-the-looking-glass book on the characters that allegedly either contributed to or didn’t contribute to the financial crisis: I Am John Galt. It has a whole chapter on Mr. Allison and his leadership at BB&T, and how his Objectivist philosophy informed its policies.

It’s a fascinating tale, actually: Mr. Allison actually went through and rewrote the corporate policies and training programs of BB&T to conform to the ideas of Ayn Rand, while also keeping the vast amount of non-atheists working at the company on board. As a Whittaker Chambers fan, I’m frightened, but as someone studying for a Professional in Human Resources certification, I’m deeply impressed with the trick he pulled off.

And quite honestly, it didn’t hurt the bank. It made it very stodgy. BB&T didn’t go deep into subprime, so it wasn’t in a bad financial position when the crisis hit. When the government took its mandatory share of the company after the TARP, that was when Allison resigned and left.

Now, as to what he said about the GSEs: he was making a general point that Fannie and Freddie were bad actors in the mortgage market, and Goolsbee then made the limited point that they weren’t responsible for a majority of the subprime market. He made the debating mistake at that point of directly contradicting Goolsbee, and one can easily point to a McClatchy editorial that says otherwise (as Noah does).

However, the McClatchy story’s headline (Private sector loans, not Fannie or Freddie, triggered crisis) makes little sense. The whole point of Fannie and Freddie is to buy private sector loans. One can legitimately argue that, whether or not the loans they bought were technically subprime, the ones they bought must not have been very good, considering that they went into conservatorship.

And Austan Goolsbee’s point is valid, but it’s limited. For one thing, there were two kinds of non-prime loans being made: subprime, and alt-A (which is below prime, but above subprime.). The GSEs went more deeply into the latter than they did the former. Secondly, Goolsbee didn’t define his time horizon. Generally, people who argue for the GSEs talk about the numbers from 2001-2008. People who argue against talk about where the GSEs total portfolio stood in 2007 (when the mortgage market started to melt down). The people who argue for the GSEs say they were trying to keep up with private-label mortgage securitizers, and the people who argue against say that the securitizers were trying to keep up with the GSEs. There is actually room for a legitimate difference of opinion here.

At least I think there is.

Recent Posts by Thomas J. Marier



35 Comments so far ↓

  • hisgirlfriday

    It makes perfect sense for a business person like Allison to latch on to Ayn Rand’s philosophies of selfishness and pursuit of personal enrichment at the expense of others. Corporations do not exist to serve other people. They only exist to create profits for their owners, after all.

    I find her philosophy abhorrent, and frankly satanic, but I don’t think adhering to her philosophy necessarily makes Allison bad at his job. He demonstrated in that CNBC clip he is quite misinformed about the cause of the financial crisis, but being well-informed about the financial crisis isn’t a prerequisite for being good at his job, strangely enough.

    Rand’s philosophy becomes much more of a problem when Randians seek to work in government or influence public policy (like when Ayn Rand fanboys get a spot chairing the Fed or the House Budget Committee) or when Rand fans in business try to tell people in government how to do their jobs based on how Rand has worked for them in the business world. Thus, Randian bankers may be great at banking in the private sector. But they’re horrible in the public sector.

  • AC

    Good points Tom. I would be interested in seeing you pursue the last one about the GSEs involvement in purchasing the mortgage securities. Was there participation necessary to keep the market liquid? Was there a market, and if so how large was it, without their participation? Now that it has all come apart why is Congress continuing taxpayer backed participation in this market?

  • sweatyb

    One can legitimately argue that, whether or not the loans they bought were technically subprime, the ones they bought must not have been very good, considering that they went into conservatorship.

    Certainly one can form the idea and put those words into a sentence, but it requires a deep misunderstanding of the mortgage crisis to actually make that argument.

    Fannie and Freddie were mortgage companies, which meant that most of their assets were tied up in mortgage paper. The mortgage crisis was a time when all mortgage paper was called into question, regardless of its origin or quality and anyone holding mortgages was F-ed up the A.

    Fannie and Freddie got hosed the same way dozens (hundreds?) of “private” banks did. But instead of getting secret bailouts in the form of TARP and the Fed’s emergency windows, they went into conservatorship.

    So, sure you could say Fannie & Freddie are to blame for the crisis, the same way you can say that someone who’s saved from a burning building must be an arsonist.

    • armstp

      Fannie and Freddie did not originate one single mortgage. They were more like a vicitim of the mortgage crisis like everyone else.

      There market share of subprime loans was small compared to the private sector, particularly for the first few years of the subprime craze.

  • LFC

    Now, as to what he said about the GSEs: he was making a general point that Fannie and Freddie were bad actors in the mortgage market, and Goolsbee then made the limited point that they weren’t responsible for a majority of the subprime market.

    Let’s roll the tape, shall we?

    Allison: Fannie and Freddie had 2.5 trillion dollars of subprime mortgages.

    Goolsbee: Fannie and Freddie were not the majority of subprime mortgages.

    Allison: Yes, they were.

    Goosbee: No, they were not. The worst performing subprime mortgages have nothing to do with Fannie and Freddie.

    Allison: That is not mathematically true.

    Goolsbee: Yes, it is mathematically true. I’ll get data for you.

    Allison: I already looked at the data. I was in the mortgage business. I saw this.
    (This last part takes away the excuse of ignorance and put Allison’s statements firmly into the territory of intentional lies.)

    As has been cited here in FF comments multiple times, private subprime mortgages exceeded those issued by Fannie and Freddie by a large margin. Private subprime also defaulted at a rate 6X higher than Fannie and Freddie. Goolsbee is obviously aware of these facts and does not try to hide them. Allison’s statements that he has seen the data means that he knows these facts as well but he has chosen to lie about it.

    He also goes on to try to blame the Community Reinvestment Act, another lie:
    http://www.ritholtz.com/blog/wp-content/uploads/2009/06/cra-chartg1109.gif

    This guy Allison is a classic dirtbag who claims expertise and then lies his ass off. Just watching his type makes me feel like I need a shower.

  • Ridge

    Re:BB&T
    “When the government took its mandatory share of the company after the TARP, that was when Allison resigned and left.”

    BBT *took* TARP money so it had to give up stock. That was paid back in 2009 to US Treasury, with interest, which is when Treasury divested itself of said stock. Not US Govt forcing itself on to a virginal BBT. To imply otherwise is disingenuous and puts other points of the article in question.

    I’ve had some dealings with BBT. Based in Winston-Salem, NC . Not a major player in GA/FLA housing boom but *was* hurt by destruction of fabic mill industry in SE. Offset some by expanding into coal fields of southern Appalachia and semi-insulated by the technical industry of NC.. They are a heavy fee based service bank. They will nickel and dime you to death. That is their major source of revenue.

    How much of their “weathering the storm” you can attribute to Allison or by the circumstances of location, I don’t know. You would have to timeline decisions. I suspect little or nothing can be laid at Rand’s doorstep and nothing good has come from those books on the national level.

    R

    • joemarier

      I’ve always suspected that “make only really good loans, charge lots of fees” is close to the ideal way to run a bank, if you’re going to go through the trouble of having actual buildings and don’t want the sign to change every five years or so.

      • lilmanny

        They also have a pretty successful insurance brokerage division. They are considered a Top 5 national brokerage (mostly commercial and benefits insurance, not personal lines).

    • chrissandvick

      Ridge: BB&T, along with a couple of the other healthy banks, was forced to take TARP despite both being healthy and not wanting it. http://www.therightscoop.com/ceo-of-bbt-describes-strong-arm-tactics-by-bernanke-to-take-tarp/

      update: looks like the linked video got pulled. Here’s a hotair link to the same story. Allison’s recounted the Feds actions in other interviews. http://hotair.com/archives/2010/01/08/video-how-banks-got-strongarmed-into-tarp/

      • Ridge

        Over 50 banks refused TARP, so regulators must have thought BB&T had a need or the Randian executives in Winston-Salem must not have been sufficiently stalwart.
        —————–
        From a Sept 09 article-
        “….I’ve dug up, with the help of research available on TARP tracker Bailoutsleuth.com, at least 54 publicly traded banks that explicitly refused to take part in TARP. And it’s worth pointing out that several of them are decent-sized.
        Hudson City Bancorp (HCBK) and People’s United Financial (PBCT) are both in the S&P 500. Commerce Bancshares (CBSH), BOK Financial (BOKF) and NY Community Bancorp (NYB) are among the 50 largest banks in the country as ranked by assets, according to figures from the Federal Reserve.

        That’s interesting considering many big-bank executives argued that they only took TARP funds because they were strong-armed into do it and thought not taking the cash would make them look weak and unworthy of government support. That justification sounds pretty bogus now…..”
        http://money.cnn.com/2009/09/11/markets/thebuzz/index.htm
        ——————–
        And this article claims that to repay the claimed “un-needed” TARP funds, BB&T had to both issue new stock and dilute its dividend to existing shareholders. I guess they *didn’t* have the money in the bank to pay off the loan and maintain dividend levels. But paying off Treasury allowed the execs to get out from under compensation and bonus limits. Funny how Randian self interest of the execs did NOT trickle down to the owners.

        http://www.marketwatch.com/story/bbt-to-repay-tarp-at-shareholder-expense

        And in an interview with ABC News, BB&T claimed that the loan wasn’t needed but voluntarily went along…for patriotic reasons, of course.
        ——————-
        3. Does your bank need the TARP infusion? If not have you considered returning the funds?
        The fact is we didn’t need it because we were already one of the strongest capitalized banks in the U.S., but in the spirit of what the Treasury was asking banks to do, we elected to participate. It’s important that BB&T do what it can to support the economy and bring stability to the financial markets.
        http://a.abcnews.go.com/images/Business/BBT.pdf
        ——————-

        So, they could have refused to participate in TARP, publically stated that they did so voluntarily, though they were strongly capitalized, yet when they wanted out from the restrictions (probably compensation related) they diluted shareholder value by issuing more stock and cut dividends. In fact, share prices have not recovered from its most recent high of 27.70 on May 6, 2009 after which the new stock issuing of 20$ a share was announced on May 12.

        While the execs might issue self righteous statements to ideologically friendly and gullible sites, an examination of the record tends to show a different story.

        • chrissandvick

          Ridge: It doesn’t follow that regulators allowing other (smaller) banks to refuse TARP means they allowed the Wells Fargo’s and BB&T’s to refuse. And Allison’s statements directly refute your back of the envelope speculations. As far the ABC news press statement, do you know who writes those those things for a large corporation? Who are you going to believe, the former CEO who walked away because of the process or the PR flack who has to worry about not ticking off the regulators? Allison’s on the record on what happened. If you don’t want to believe him fine but I’m thinking your opinion of his honesty ranks right up there with the banking expertise of the intern.

  • LFC

    Anybody who actually wants to see data and analysis consistent with the data on the causes and actors in the run-up to the global financial collapse should read Barry Ritholtz’s excellent and fact filled writing on the subject.

    This article is excellent:
    http://www.washingtonpost.com/business/what-caused-the-financial-crisis-the-big-lie-goes-viral/2011/10/31/gIQAXlSOqM_story.html

    This one is filled with charts backing his assertions and destroying Allison’s:
    http://www.ritholtz.com/blog/2011/11/examining-the-big-lie-how-the-facts-of-the-economic-crisis-stack-up/

    Here’s the McClatchy article he cites on the bogus Fannie and Freddie assertions he makes:
    http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html

    And here’s plenty of other graphs showing the same trend.
    http://www.anthonyworlando.com/2011/10/27/the-art-of-distraction/

  • Ex Cathedra

    Greenspan is an Objectivist. He admits Objectivism informed his refusal to regulate sub-prime mortgages.

  • LFC

    And I’ll toss in one more article with nice chunks of actual data contradicting Allison:

    http://www.nybooks.com/blogs/nyrblog/2011/jul/13/why-fannie-and-freddie-are-not-blame-crisis/

    Money quote (also known as data, a concept foreign to the denialists):

    Even so, the default rates on GSE mortgages were far lower than on those bought and issued in the private market. In 2004, the GSE default rate was 4.3 percent of their mortgages compared to a default rate in private industry of 15.1 percent of mortgages. In 2005, the GSE default rate was 7.8 percent—high and disturbing; but in private industry it was 28.7 percent, the source of the severe crisis. In 2006 and 2007, default rates reached 13.2 and 14.9 percent in the GSEs and 45.1 and 42.3 percent in the private market.

    So in chart form, default rates of GSEs compared to private industry were:
    2004: 4.3 vs 15.1
    2005: 7.8 vs 28.7
    2006: 13.2 vs 45.1
    2007: 14.9 vs 42.3

    And remember that this was during a time when private industry was originating significantly more subprime loans than the GSEs.

    I feel it is important for every fiscal conservative to call out these revisionist liars. They told us financial deregulation and government were stifling growth in the 1980s and we ended up with the S&L collapse. They said the same thing at the turn of the century and we ended up with the biggest economic collapse in 80 years. Now they want to blame government and regulations yet again and allow the financial industry take another swing at it, even before the blood from this last debacle has dried.

    • armstp

      big +1

      You can go over and over the facts, which people have been doing for several years now and these ideological morons want to continue to blame goverment and Fannie and Freddie for the complete collapse of the housing market. Fannie and Freddie played a minor role.

  • armstp

    Mr. Marier,

    You fail to address Mr. Allison bigger point and the one he stresses more in the roundtable discussion, which is that the financial crisis was caused by government pushing banks to lend to low income people so they could buy houses.

    That point is completely false, as Goolsbee points out. If Mr. Allison is pointing to the Community Reinvestment Act (CRA), which is mentioned, that Act had almost nothing to do with subprime and the financial crisis. This has been proven time and time again. The mere fact that most of the Subprime orginators, like Countrywide, did not even fall under the CRA should be proof enough.

    Goolsbee rightly points out that it was essentially deregulation and the banks ability to add leverage that was the main problem that resulted in the collapse in financial markets. Without the leveraging up of the banks, the multiplier effect of derivatives and too-big-to-fail, we would have just been dealing with a housing downturn and not a full ledge meltdown in financial markets and collapse in the economy.

    • MaxFischer

      + 1

      As we’re all aware – or should be, anyhow – the Community Reinvestment Act was signed into law by President Jimmy Carter in 1977 (!) and functioned admirably for 30 years before the financial crisis struck. Nowhere in the CRA does it specify that banks should make loans to people who are unable to pay them. Anyone who mentions the CRA as a cause of the financial crisis – big or small – identifies themselves as a crank who either doesn’t know what they are talking about or is simply a liar.

      • joemarier

        There are a variety of what I’d call “TRUUE conservative takes” on the causes of the financial crisis, and I don’t hold a brief for any of them (I have philosophical difficulties with the idea of direct cause and effect, especially when it comes to massively complicated multivariable systems, so I’m drawn to mealy-mouthed “on the one hand… on the other hand” explanations like the one in All the Devils Are Here).

        That being said, the better truue conservative takes generally don’t say that the 1977 CRA led directly to the financial crisis. Rather, they pin the greater blame on varying expansions of the CRA concept that were passed in the 1990s, often in a bipartisan fashion, towards the goal of expanding homeownership. And even then, the problem isn’t so much that people were using loans to move from renting to owning: it’s that the loans created for that purpose were being used more and more for refinancing and buying on spec than they were for the purpose for which they were allegedly being created.

        My point: there was a real philosophical difference between people who were running banks like John Allison was, and people in positions of power that were more aggressive in loosening mortgage standards. To go back to why John Allison insisted that the majority of mortgages made by Fannie and Freddie were subprime: Fannie and Freddie were buying loans that BBT wouldn’t make. By BBT’s definition, if not by the academic/legal standard, they were subprime. That’s the dynamic I find interesting.

  • Antipodean

    I happened to be present last year when Mr. Allison was invited by the Columbia Law School Federalist Society to give a presentation on the causes of the financial crisis. Approximately one third of the presentation was devoted to the virtues of Ayn Rand and Objectivist philosophy. The other two thirds contained numerous errors apparent to anyone with even a cursory familiarity with the origins of the financial crisis, including the canard about Fannie & Freddie causing the crisis.

    To give Mr. Allison his due, he went on the record as having absolutely no problem with the government enforcing strict leverage limits on banks – 20%+ reserve requirements. Nevertheless, he allocated no time for questions, making it impossible for any audience member to rebut his fallacies. I shudder to think how many students may have walked away from that lecture thinking his speech was grounded on solid facts.

  • valkayec

    Ayn Rand’s philosophy is for ego-centric adolescents. Period. Stop.

    Anyone who has grow up and matured realizes that such thinking as Rand proposed is absurd and juvenile.

    • TJ Parker

      Moreover by learning a bit of mathematics and then some economics, they are provably so.

      The vehemence of her atheism, though, was prescient. If only she could see today’s GOP, purveyors of the Jesus fetish.

  • sparse

    The arguments made here encouraging readers to trust randian bankers are not alt-a, they are sub-prime. Do not invest in them.

  • Boston Patriot

    Government interference in the free market caused the financial crisis. No good comes from the government holding a gun to people’s heads and forcing them to do things against their will. It is immoral and, therefore, disastrous in practice. That’s all we Objectivists want, politically, is to be left free from the initiation of physical force- from both private criminals and from the government itself (who, when initiating force against its own citizens, is acting as a criminal). For those interested, and willing to spend the time, here is the best analysis of why we are in the mess we are in today:

    http://arc-tv.com/the-financial-crisis-what-happened-and-why/

    • balconesfault

      No good comes from the government holding a gun to people’s heads and forcing them to do things against their will.

      This isn’t going to be another one of those “the CRA was a gun to the bank’s heads” things, will it?

      If it is, we’re going to have to laugh at you. That one is even more ludicrous than the idea that Fannie and Freddie created the problem.

      • LFC

        And let’s not forget about the ridiculous notion that it was completely the fault of people taking out mortgages they couldn’t afford and that the lenders were just victims of these evil people.

        The fantasy world that the right-wing created and desperately clings to is really an example of denial at a whole new level. People like this are so untethered from reality that they could believe evolution wasn’t real or deny the overwhelming science backing man made climate change. Oh wait. Never mind.

    • sweatyb

      That’s all we Objectivists want, politically, is to be left free from the initiation of physical force

      And all I want is to ride a flying unicorn to work.

  • LFC

    Somebody relatively recently cited a quoted here at FF about Ayn Rand that I found to be hilarious. (Thanks to whoever that was.) Here it is again for those who missed it.

    “There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.”

    – Kung Fu Monkey, 2009
    http://kfmonkey.blogspot.com/2009/03/ephemera-2009-7.html

    • chrissandvick

      My response to that is Ecuadores largest newspaper ran this Rand quote on an otherwise blank page:
      “When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed.”

      So Rand is either childish fantasy to anonymous forum denizens or inspiration for those fighting for freedom at genuine risk. If its the later, what does that say about you LFC?

      • LFC

        Since Rand’s philosophy is pure fantasy that would do nothing more than turn power over to the richest (trading gov’t power for corporate power), anybody inspired by her words either doesn’t grasp them or can’t understand the real world consequences if they were implemented. So the latter would say vastly more about them than me.

        • chrissandvick

          Bold is the man is who mocks the reasons of those who put their lives and freedom on the line for a principle. Not really…

  • jamesj

    “There is actually room for a legitimate difference of opinion here.”

    You make a valiant effort, but at the end of the day folks like Goolsbee and myself prefer to make our judgements based on the empirical data. There is a mountain of cold, hard fact pointing out that the crisis came about predominantly because of private business practice and regardless of perverse federal incentives (which surely did exist, but were not the primary cause or the most proximate actor). The essential laws of economics allow for the possibility of massive negative externalities committed by private market actors in any completely free market.

    Allison argued that perverse incentives from Freddie, Fannie, and the government were the primary causes of the crisis. He insisted that bad behavior at the private business level was mostly due to Freddie and Fannie. But the data says otherwise. And don’t you agree that causes should be as proximate as possible to the event you are analyzing? Data and sound methods of analysis prevent most reasonable people from believing that Freddie and Fannie were the primary cause, or even a significant cause, of the crisis. There comes a point where a man must go with the evidence even if it agitates his beliefs.

    “There is actually room for a legitimate difference of opinion here.”

    I respectfully disagree. Or, if your definition of “legitimate” allows one to ignore overwhelming empirical data and sound methods of analysis, you could also say there is room for legitimate difference of opinion about just about any issue.

    That’s the problem. We’re stuck debating a non-issue with folks who refuse to let go of the shattered remnants of a worldview. You have a choice. Continue to cling to those idealistic remains (at great cost in wasted time and resources for your fellow countrymen) or join the rest of us in agreeing on the obvious causes of the crisis and beginning to forge real failsafes against those causes for future generations. This won’t result in the death of markets or individual liberty, unless of course you drop your responsibility to argue in good faith and thus turn the ignorant public against you to such a heavy degree that we swing the pendulum too far in the opposite direction from what you’d love to see.

    We’re not discussing the dismantling of markets here. We’re simply discussing whether there should be reasonable failsafes against the predictable and natural negative consequences of any free market… the type or negative consequences that can cause massive pain every few generations. Must we just let it be? Are there no reasonable alternatives?

    Markets are like the weather. They are a part of nature. Tampering with them could cause a disaster. You can’t change them much and you can’t do away with them, but you also don’t have to sleep outside in a blizzard with your family. There are ways to live in harmony with nature while still sheltering yourself from nature’s most violent mood swings. Admitting this truth is one of the most traditionally Conservative actions a person can take.

  • heap

    the randian bit all seems tangential as hell.

    ‘do you trust a banker that lies his ass off’ seems a more relevant issue, and one that actually deals with the issue at hand.

    the randian bit is interesting convo, but…remove randian/objectiviwhosits from the subject and you still have the same issue – the guy lied his ass off.

  • chrissandvick

    Marier: I’m trying to think where outside forums like this where a McClatchy editorial, and the opinion of an intern, are counted as references. Allison lived the mortgage business for decades, was involved in efforts to reform Fannie/Freddie and helmed a successful bank, not just in good times but when most of the other banks in the industry made horrible choices and went against that trend. Allison specifically credits Objectivist ideals for their low exposure to subprime (as a bad product for their customers, in opposition to nearly the entire industry). The nasty snark of most of the commenters here is completely unjust. Most of them seen to think Allison’s in the same camp as the Citibanks, WaMu’s and BofA’s when BB&T went against the trends that sank those other banks, against “because everyone else is doing it”

    Frankly the guys a business hero.

    One other thing, I followed Noah HT to Barry Ritholtz where he snarks. “Apparently the financial industry was not deregulated.” You have to be insane, completely bonkers (or dishonest), to think the most heavily regulated industry on the planet outside maybe nuke plants was “deregulated”. Allison is completely correct when he says the industry was misregulated.

    • sweatyb

      There are a lot of people who aren’t Objectivists who also did not invest in subprime. Are they also business heroes?

      The thing that Allison did that brings him in for criticism is excusing the actual bad actors by casting blame on the victims and the regulators.

      And I don’t know what you mean “misregulated”. That’s an incredibly squishy word (I know how you Objectivists do love your squishy words).

      Regular banking may be a heavily regulated industry, but the “shadow banking” industry was almost completely unregulated. Which is why, for example, AIG was able to use CDOs and other such instruments to sell de-facto insurance without having to follow the myriad federal/state regulations on insurers (such as requirements that insurers have sufficient collateral to pay out a significant portion of their outstanding claims).

      • chrissandvick

        Sweaty: In the banking industry? Who.

        When you start looking at Freddie and Fannie as “victims”, when they were leveraged to insane levels, you’re still in excusing the bad actors.