Posted by: Dave Wilson | September 24, 2008

“Rescue” Plan from a Healthy Bank’s Perspective

This one came across the desk this morning. It’s a portion of letter going out today from John Allison, President & CEO of BB&T, to every member of the US Congress.

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?


  1. […] Via National Review SC Conservative has the scoop from BB&T CEO John Allison. These are suggested guidelines for the bailout package. He submitted this list to all members of Congress. […]

  2. Linked.

  3. […] Allison, President & CEO of BB&T, in his letter to Congress: Key Points on “Rescue” Plan From A Healthy Bank’s Perspective […]

  4. when the details of the deal are finally released I will be interested to see how many of their points are accepted.

  5. Get ths man on tv quick! I am so glad I came across this. As the issue has been debated during the past week, I wasn’t getting the feeling by just going about my business that the sky was falling. I hope some of them took the time to read this letter, but I really think this is more about political ideology, and saving face for most of the politicians….. The little tiny credibility they have will entirely be gone if they decide they have overreacted. I would predict that any response to Mr. Allison’s letter will be only to refute one or two points, made for theater lines.

  6. […] get our nation out of the current crisis. However, the CEO of a bank is qualified to speak to it. This is part of a letter reportedly sent by John Allison, CEO of BB&T, to all members of […]

  7. After reading this, I wonder if Mr. Allison actually works at a bank.

    What is missing from his proposal is how many mortgages his own bank had SOLD to Fannie and Freddie to get that paper off BB&T’s own balance sheet. (there’s no implication that BB&T wrote sub-prime or Alt-A mortgages. I only meant that banks sold all types of mortgages off to Freddie and Fannie to get cash to fund writing more mortgages. BB&T, I am sure, had done that in the past.)

    Also, the pricing of real estate assets issue has nothing to do with the value of the homes themselves but these complex securitized instruments that include numerous parts of many mortgages and corporate debt instruments bundled together that had a projected payable yield. These instruments were sold to institutions such other banks, insurance companies, pension funds, sovereign wealth funds, private foundations, trading partners, etc. that sought solid returns on their money. When returns on investment fell short of those projections, selling them became difficult because there is no clearly defined market for them. It is a closed trading world between a limited number participants that has no oversight, no transparency, no uniformity in valuation, yet carry over a trillion in face value. If Mr. Allison is unaware of that, I am sorry that he has not kept up on educating himself about developments in finance.

    Plus, did anyone in his office tell him that last Friday the interbank rate shot up to over 6% within 24 hours or did he leave early for a golf weekend getaway? Did anyone tell him that a lack of confidence between institutions creates a scarcity of CASH in circulation?

    It is this lack of confidence that Paulson and Bernacke are attempting for forestall with this $700 bil buyout.

    The free-market ideologues have never lived through these style events because the last time something like this came around was in 1907. This is not a 1930 event, this is a 1907 style event.

  8. Hear Hear!!!

  9. […] Jonathan emphasizes  Healthy Banks to Congress ; Lex links to:   Opposed economists & Bailouts Depressing historical […]

  10. […] This is interesting – the CEO of BB&T Bank, which is apparently doing just fine, is sending an open letter to Congress concerning the proposed bailout plan. I’m on the fence about this bailout. If it’s […]

  11. […] I’ll give a taste of it by listing his first point; read the whole thing. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported … […]

  12. […] […]

  13. what about ACORN?

  14. don’t have to publish this but there was a provision in the bailout to give something like 25% to ACORN, the Obama friendly group who has been guilty of voter fraud in many states across the US and has done nothing positive for housing…although they are supposed to

  15. […] for sure: that we won’t all agree. Personally, I actually find myself agreeing with many of the points made that support the rejection of this bailout. Here’s a sampling of what I’ve […]

  16. […] But first, I recommend reading a letter that I was forwarded from BB&T’s CEO John Allison to Congress, which Dave Wilson blogged about last week. […]

  17. Did anyone tell him that a lack of confidence between institutions creates a scarcity of CASH in circulation?

    Really? Somebody better go tell Microsoft, General Electric and the other industrial concerns who are not yet having issues with their commercial paper.

    Sept. 29 (Bloomberg) — The same credit crunch gripping banks, brokers and insurers is providing industrial companies with the lowest short-term borrowing costs in almost four years.


  18. […] This letter from John Allison, BB&T’s CEO helps explain my inherent, gut opposition to the bailout (read the whole letter) – PDF here […]

  19. Thank u

  20. […] chairman John Allison had previously spoken out against the bailout in a letter to Henry Paulson. Additionally, in the wake of 2006’s Supreme Court decision in Kelo v. City Of New London, […]

  21. […] up on the financial messes, and in Excel I made this draft version of a against the bailouts. (Via measured list of points on the bailout issues. Update Three: Craig Depken has this choice item on Anti-Americanism […]

  22. […] to promote the study of Rand’s ideas. During the early days of the 2008 financial crisis, Allison had sent a strongly-worded letter to Henry Paulson speaking out against the proposed TARP ba… It’s good to hear he still holds to to his […]

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