I Am John Galt (13 page)

Allison says, “We were told over and over again if we just had mathematical models like Wachovia and like Bank of America . . . we would be wonderful from a best practices perspective.”
7
Thanks to the utter failure of their models to capture the true risks they were taking in the mortgage portfolios, Wachovia failed in mid-2008 (it was sold by the Federal Deposit Insurance Corporation [FDIC] to Wells Fargo), and Bank of America had to be rescued by extraordinary interventions by the Treasury and the Federal Reserve in early 2009.

Has anything changed, now as we stand in the rubble of a model-driven banking blowout? Nope. “This is bizarre,” says Allison. “They still believe it. We're still being told we need mathematical models like Wachovia's. . . . There's still a religious belief in mathematical models.”
8

Allison thinks the models are doomed from the get-go because they are based on fundamentally incorrect notions. “They always assume normal curves, and they try to manage things to a 99 percent probability. That means there's only a 1 percent probability that certain bad things can happen. Well, there's an interesting thing with a 1 percent probability: Give it long enough, and it becomes certain.”
9

Value #3: Independent Thinking

Allison calls independent thinking “the most important psychological decision you can make, to be responsible for yourself.”
10
It's the root of all creative achievement, and creative achievement is the root of all human progress—practically by definition.

Have you ever worked for a bank? If you have, and if it wasn't BB&T, chances are you weren't encouraged to think independently. Quite the contrary. Indeed, banks are known for their hidebound conformist cultures. That's why most banks haven't grown like BB&T has, at least not without taking absurd levels of trading risk that came back to bite them in the mortgage collapse.

At the same time as they were taking those absurd risks, most banks failed to think independently. It was a lethal combination—crazy risk taking and herd mentality—and it was imposed by fiat by banking regulators.

Allison points a finger at so-called fair-value accounting—newfangled accounting rules imposed on banks for the first time several years ago, requiring them to appraise their investment positions based on transitory mark-to-market prices rather than independent analysis of value.

“That sounds good,” Allison admits, “but there are times when you can't mark to market because you can't figure out what it is. And fair-value accounting violates the basic laws of supply and demand. For there to be a market price there has to be a willing seller and a willing buyer.”
11
In the mortgage crisis of 2008, there were no willing buyers or sellers of so-called toxic assets—and the fire-sale prices that resulted from what few trades were done gave an unrealistically low appraisal of these assets' worth.

Fair-value accounting violates the principle of “going concern,” Allison says, “because it assumes that everyone has to sell assets when they don't have to sell assets.”
12

Allison thinks this was “a major cause of the liquidation we had”
13
because banks like BB&T weren't willing to take the accounting risk artificially imposed on them by fair-value accounting. If they'd stepped forward and bought the toxic assets that were being sold by distressed banks, they'd have to show on their books large losses if those assets subsequently traded at unrealistic fire-sale prices, even though they knew to a moral certainty that they were worth much more. Without fair-value accounting, it would have been just the opposite. They could have booked immediate profits by buying assets on the cheap—and in doing so, they would have supported a market that was desperately looking for buyers.

There was another failure of independent thinking that contributed to the mortgage crash: the overreliance on the three rating agencies, Standard & Poor's (S&P), Moody's, and Fitch. Allison calls them “a government monopoly,”
14
and blames their too-optimistic ratings of mortgage-backed securities for helping to transform problems in the small market for subprime lending into a large-scale systemic banking crisis.

When mortgage-backed securities that had been rated investment grade suddenly became toxic assets, the market “totally lost confidence in the ratings system.” In other words, a market that had not done any independent thinking (it had just relied on S&P, Moody's, and Fitch) suddenly had nothing to go on. “So we had a real lockup in liquidity,” Allison says, even in “instruments that really were performing . . . because nobody trusted the ratings system.”
15

Value #4: Productivity

Rand's character Francisco d'Anconia expressed it this way: “. . . there's nothing of any importance in life—except for how you do your work. Nothing. Only that. Whatever else you are will come from that.”

Okay, maybe that's a bit much. For Allison, BB&T is looking for high performers who have “a gut level commitment to getting the job done.”
16
BB&T wants to filter out low performers who “seek reasons to fail.” High performers “face the same obstacles” as low performers, according to Allison, but they get over them and succeed.

If the bank's purpose is to produce shareholder wealth, then it has to produce profits. What are profits? Allison says they're just the difference between the value BB&T creates for customers and BB&T's cost of creating that value—“the bigger the difference the better.”
17

The way you make that difference bigger is through efficiency and productivity. It's really just that simple.

Value #5: Honesty

Honesty doesn't mean just keeping your fingers out of the till. Any bank insists on
that
. With BB&T it's an obsession with ethical conduct 24/7, complete transparency—not even a white lie, and no exceptions for the bosses at the top of the pyramid.

Allison says, “No fudging. . . . We acquired companies that had a couple leaders that really weren't totally honest. They weren't totally
dis
honest. . . . But particularly they wouldn't disclose. They may not lie to you, but they would effectively lie because they wouldn't disclose when something was going wrong. Well, in our organization, that's not tolerable. So we drove that kind of leader out.”

Rank-and-file employees are glad to see less than honest leaders shown the door. Allison says, “The employees know something is going on. And once we dealt with some of these issues . . . people would say, ‘Man, I'm glad you got rid of Joe! Joe wasn't telling you the truth about this, and he was kind of keeping me from telling you the truth about this.'”

There's no exception for employees just because they're making a lot of money for the bank. Allison recalls, “Our number-one mortgage producer—this was before the mortgage market busted—number one in production, number one in revenue. . . . We found out he was fudging on his reports, and we fired him. And we fired him immediately, without hesitation or reservation, even though he was our number-one producer.” It didn't matter one bit that “most of our mortgage production is sold in the secondary market, so in a way you can argue there was no ‘risk' in what he was doing.”

But there was risk. This sleazy “number-one producer” went to BB&T's competitor Countrywide Financial after he was fired. Allison says, “I think he got fired there. . . . He got fired as they all went broke.” It's no coincidence that Countrywide was run by Angelo Mozilo, whom we'll soon meet in Chapter 4, “The Parasite.” If Allison is
Atlas Shrugged
hero John Galt, then Mozilo is villain James Taggart, the corrupt businessman who'd stop at nothing, even the destruction of his own company.

Value #6: Integrity

Integrity is different from honesty. It means always doing the right thing, always acting consistently with one's philosophy, no matter what. Sometimes it can mean doing the right thing even when clients seem to be clamoring for you to help them do the wrong thing.

In the housing bubble, plenty of home buyers wanted pick-a-payment mortgages. These allowed the borrower to choose to defer payments of interest and principal each month, effectively making the amount owed to the bank larger and larger. That's fine if the value of the underlying real estate rises, keeping up with the rising amount owed. But if the value goes down, or even stays flat, home buyers can find themselves under water—owing the bank more than the house is worth.

While just about every other bank was making a fortune with pick-a-payment mortgages because they commanded much higher fees, BB&T refused to make such loans. Allison says it wasn't “because we had a brilliant insight on the real estate markets, but we knew real estate wasn't going to appreciate 10 percent per year forever. That was just mathematically impossible.”

It's not about the money; it's about integrity. Allison insists that “one of the fundamental commitments in our mission is to help our clients achieve economic success and financial security. I would expect to make a profit doing it, but one thing I say to our employees over and over: never consciously do anything that's bad for your client. Even if you can make a profit in the short term, it'll always come back to haunt you. Even if he seems to want it. . . . It was really an ethical decision to do that, and it saved us a fortune.”

You might think that Allison took some career risk in making the tough call to not do pick-a-payment mortgages, turning his back on a red-hot product that was earning billions in profits for competitors. Actually, Allison didn't make the call at all. “There's a guy that runs our mortgages here that's been with us a long time, that is very aligned with our culture. He made the decision on his own, without ever talking to me. Now, when I heard about it, I told him I thought it was a wonderful decision.”

Another example of integrity in action at BB&T is the way the bank reacted to the U.S. Supreme Court's decision in
Kelo v. City of New London
. In that landmark case, the court upheld a city's right to take private property under eminent domain and then transfer that property to private parties. The logic was that if the city believes that the property will generate higher tax revenues or otherwise further the city's goals when placed in new private hands, then that satisfies the U.S. Constitution's requirement for “public use” to justify a taking of that property.

From Allison's perspective, the
Kelo
decision “threatens property rights, which is the foundation for being in our whole business.” So he decided to protest by announcing that BB&T wouldn't make loans to real estate developers to buy or improve property acquire through eminent domain.

What happened next was a surprise. Allison remembers, “First thing, honestly, I didn't think people would pay much attention to it.” But then, “We had thousands of people move their accounts to BB&T. And you know what a lot of them said? It was partly about eminent domain but it was partly about businesses acting on principle. People believe that businesses have no principles—they'll do anything for a buck. And I got tons of letters saying, ‘Yeah, eminent domain is awful, and gosh, it's nice to hear a business might do something over principle.'”

Value #7: Justice

This is where BB&T makes a key commitment to every employee. Justice, as Allison puts it, “means you're going to award superior performance and deal with nonperformance.”

BB&T obsessively measures performance, quantitatively and qualitatively. And every single employee, right down to the teller line, is eligible for incentive compensation based on good performance.

And the reverse is true. Poor performance means no incentive compensation, though the bank will always invest in its people through training to help poor performers learn to be excellent ones. But break the bank's values, especially in the domains of honesty or integrity, and it's time to leave.

It wouldn't be justice if Allison himself didn't have to eat his own cooking. His compensation as CEO has always been mostly on an at-risk basis, determined objectively by the reality of whether BB&T hit agreed targets for earnings-per-share growth, return on assets, and return on equity.

Justice has another critical meaning for BB&T employees, who have seen their bank grow over the years by a series of acquisitions and mergers, every one of which potentially poses a threat to job security. Remembering the merger of equals with Southern National Bank that started it all, Allison says, “The justice was, if we clearly had a better person to do the job, we would get the person to do the job. Easy. But a lot of times, that ain't so clear. Because you've got different inputs, you've got different people. . . . We were going to try to create balance between the two organizations, because part of the justice was being fair to both teams.”

This has been absolutely key to BB&T's growth, which has been to a large extent driven by a series of acquisitions, made at the right price and then executed perfectly. Chief operating officer Christopher Henson recalls, “Prior to Southern National, we had built up over the years a preferred acquisition status because we had a no-layoff policy.” But all that had to change when BB&T did deals where “we were going to have to have 35 percent to 40 percent cost saves.”

Yes, in those situations jobs would be lost. But, according to Henson, “I think the market understood, the acquired understood, that we would take a wholesome approach, as wholesome an approach as one could with the employee base. . . . Social issues get in the way if you don't have a culture that focuses on doing the right thing.” And when social issues
don't
get in the way, everybody wins. According to Henson, because BB&T was a trusted acquirer, there were many acquisitions when other banks without a well-trusted value system were willing to pay more money, but BB&T was the one that got the deal.