Letter to Congress from the CEO of BBT

Hat tip to commenter DB for posting a link to this letter from Branch Banking & Trust Co. (NYSE: BBT) CEO John Allison to Members of Congress. Below is an excerpt. Mr. Allison's second point is consistent with the view of the contrarians quoted in an earlier post ("Is the Credit Crisis hurting the Real Economy").

Key Points on “Rescue” Plan From A Healthy Bank’s Perspective

1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.


2. There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.


3. While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.


4. Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.



5. A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed “rescue” plan.


6. This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.


7. The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, “out of the blue” guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.


8. Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bailout insurance companies, investment banks, hedge funds and foreign companies.


9. It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?


10. The proposed bankruptcy “cram down” will severely negatively impact mortgage markets and will damage well run institutions. This will provide an incentive for homeowners who are able to pay their mortgages, but have a loss in their house, to take bankruptcy and force losses on banks. (Banks would not have received the gains had the houses appreciated.) This will substantially increase the risk in mortgage lending and make mortgage pricing much higher in the future.


11. Fair Value accounting should be changed immediately. It does not work when there are no market prices. If we had Fair Value accounting, as interpreted today, in the early 1990’s the United States financial system would have crashed. Accounting should not drive economic activity, it should reflect it.


12. The proposed new merger accounting rules should be deferred for at least five years. The new merger accounting rules are creating uncertainty for high quality companies who might potentially purchase weaker companies.


13. The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the total financial system.



14. Arbitrary limits on executive compensation will be self defeating. With these limits, only the failing financial institutions will participate in the “rescue,” effectively making this plan a massive subsidy for incompetence. Also, how will companies attract the leadership talent to manage their business effectively with irrational compensation limits?

Why the Popular Opposition to the Paulson Plan?

The simplest explanation is that, like the contrarians I quoted in the previous post ("Is the Credit Crisis Hurting the Real Economy?"), most Americans don't see how the crisis on Wall Street affects Main Street, and so they're not interesting in helping out Wall Street firms.

Another explanation, proposed by Salon's Walter Shapiro ("The Voters are Angry -- And Don't Know Why"), is that the folks on Main Street don't understand the issue. Shapiro notes that both presidential campaigns have avoided discussing the credit crisis in their ads and writes,

Both campaigns are basing their TV ads on non sequiturs, presumably because they believe that most voters cannot handle a serious discussion of the liquidity crisis on Wall Street.

Sadly, this cynicism may be justified. A Pew Research Center poll released Wednesday found that 43 percent of all voters admitted that they feel "confused" by the proposed plan to stabilize the financial markets. At the same time, voters grasp that something important is happening -- 54 percent say, in response to another question, that they are paying "a lot" of attention to the bailout debate in Washington. Pollster Andy Kohut, the director of the Pew Research Center, said that it was virtually "unparalleled" to have this simultaneous level of interest and confusion in a policy debate. "It's a tough one to get into the nitty-gritty of," said Kohut. "It is not like gay marriage that is easy to grasp no matter what your point of view is."

McCain Should Bring Back the Straight Talk Express

Can a Republican married to a beer distributorship heiress win the presidency by railing against Wall Street and otherwise engaging in populist demagoguery? That doesn't seem to me to be a promising strategy. Why not engage in a little of his famed straight talk and point out that one of the causes of the current crisis was that millions of Americans borrowed recklessly and then walked away from their obligations?

Obama has followed a similarly dishonest populist tack, as even his ardent supporter Andrew Sullivan acknowledges,

Instead of telling Americans in no uncertain terms that their recklessness has consequences, he too is peddling populist blather. He too will spend money the government doesn’t have to protect small-time borrowers from the consequences of their folly. He too blames companies that operated within the rules as dictated by Congress for maximising their profits by irresponsible lending.

All the more reason for McCain to try to differentiate himself by not pandering, but that would require smarter positioning than his campaign has demonstrated over the last week. The smart thing to do now is to be statesmanlike and express support for the bipartisan rescue being negotiated this week. No more stream-of-consciousness musings about firing administration officials -- if anything, express confidence that we're in good hands with Paulson and Bernanke. The next step is to start looking ahead, for the next bounce of the ball. That means acknowledging, as Mark Cuban mentioned in his blog, that this rescue will be a fiscal game changer¹. The economic proposals made by McCain and Obama that were unrealistic before won't become any more feasible after Congress allocates ~$700 billion to buy up distressed mortgage debt.

McCain can benefit from recognizing this reality first. That may require him to walk back some of his tax cut proposals, but that will probably cost him less politically than it will cost Obama to walk back his promises, simply because Obama has made more generous promises to a broader cross-section of the electorate. A Republican candidate who maintains even the faintest claim to fiscal conservatism, as McCain once did, can't beat a Democrat in a Santa Claus contest anyway, so why try? Why not propose policies that will lead to a stronger, stabler economy in the long run, and trust the American people to vote for them instead of trying to promise them a bigger free lunch than the other fellow?

¹It's also important to distinguish between the fiscal response to the current crisis, which needs to be hammered out within days, and the regulatory response, which doesn't and which would benefit from a thoughtful deliberation by the next administration and the next Congress.

AP: Stocks Surge on Report of Entity for Bad Debt

AP: "Stocks surge on report of entity for bad debt". Excerpt:

A report that Treasury Secretary Henry Paulson is considering the formation of an entity like the Resolution Trust Corp. that was set up during the savings and loan crisis of the late 1980s and early 1990s left investors ebullient.

Excellent news, if it turns out to be true. I floated a somewhat similar idea in a recent post