Saturday, September 27, 2008

John Allison takes a stand

According to blogger Dave Wilson, Objectivist John Allison, President & CEO of BB&T has shared his thoughts on the current mortgage panic:
    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?

4 comments:

Burgess Laughlin said...

> "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, . . ."

Is there an implication here that regulating banking is okay, but there shouldn't be new interventions?

Perhaps the author was assuming "givens" of the coming bailout as being unassailable at this time. If so, that might work as a short-term tactic. Wouldn't it be better to state the applicable principle: Protect individual rights by removing all government regulations, restrictions, and supports from the marketplace in all ways.

Paul Hsieh said...

This bailout is just to force responsible banks and citizens to pay for the government-encouraged irresponsibility of some lenders and homeowners.

In about 15-30 years, we're going to run into similar problems when Social Security hits its crisis. Those who have lived responsibly and saved for their retirements will be asked to pay for millions of people who failed to plan for their futures and save. When SocSec runs out, we'll see similar calls to bail out the system and on similar grounds -- "we can't have economic catastrophe".

It's not going to be a pleasant day...

shahnawaz said...

when will the dumb american public get it?govt interference never works.objectivists have have an uphill task cleaning the kantian stables.
at times it seems that a culture is self perpetuating and once it reaches a certai point it gathers critical mass and is than blind to its own lethality.objectivists need to act like shock troops and force the culture to see its own somnambulism.
in that task i salute u guys for slugging it out with the dark agers all around us.three cheers for nick,ed,paul,diana,burgess etal.
ali
pakistan

Rick "Doc" MacDonald said...

I've seen opinions that recommend a wide variety of options that the government could take to reduce the extent of the bailout. I'm in favor of doing whatever will reduce the amount of money the Treasury will need to print and the taxpayers will need to support to restore full faith and confidence in U.S. currency and markets. I've listed a few on my own blog.

I do believe, however, that it's not long before Main Street feels the sting of this debacle in the form of tight credit, even in the face of lower interest rates (which I will predict will be set by the Fed before Friday).

If money trickles down in a good economy, it only makes sense that pain would also trickle down in a bad one. Coming from very humble beginnings, I can tell you that once you've been poor, you have no fear of surviving that state of being a second time. It's not a state to admire, but it's only scarey to those who haven't been there.

Main street will soon start crying out. In fact, many politicians are now reporting that after the DOW dropped 777 points, they have been deluged by callers angry about the failure to approve the measure. So, Main Street may or may not already be speaking, but make no mistake - they will be heard soon unless something is done to improve liquidity and free up credit. The majority of Americans are so spoiled they will not tolerate having to "wait" and will act like any other spoiled child would.

Thanks for your efforts to keep us well informed on important issues.