BB&T Chair Blames Government Policies For Financial Crisis

(RTTNews) - The policies of the U.S. government, rather than financial misconduct, is the cause of the current financial crisis the Chairman of the Board of the Branch Banking & Trust Company argued Friday. BB&T was one of the banks that underwent the government stress tests, and it was found not to need any additional capital.

Speaking at 45th Annual Bank Structure and Competition Conference hosted by the Chicago Federal Reserve Bank in Chicago, John Allison explained his believe that rather than help the situation, government policymakers like the Federal Reserve, Treasury Dept., and Federal Deposit Insurance corporation turned a natural market correction in to a panic.

Allison was highly critical of government policy, noting that overinvestment from the Fed, FDIC, and SEC along with housing policies of Fannie Mae and Freddie Mac helped to contribute to the market panic.

In that same vein, Allison argued that the Treasury, President, and Congress created a panic, turning a natural correction into a financial crisis with their intervention and inconsistent bailouts.

The Troubled Asset Relief Program, a $700 billion financial rescue plan passed in October at the height of the credit crunch, is a big mistake according to Allison. His bank, BB&T is one example of the healthy financial institution hurt by the legislation, he argued.

"In the bad times, the good guys don't get rewarded as the bad guys are bailed out," he said.

Therefore, there is less incentive to be conservative in good times, if the rewards for being conservative in bad times are made null bailouts.

Citibank has been bailed out 3 times in his 28-year career, Allison noted, and each time they come back bigger and worse.

"A zebra cannot change its stripes," he joked, arguing that bailing out Citigroup (C) is not the right move.

In addition, inconsistency with bailouts adds to instability in the financial system, he said.

The goal of the Federal Reserve is to create less volatility in the short term, he noted. However, trying to reduce short term volatility often creates more volatility in the long term, he argued, leading to a greater crises later on.

He suggested that the government make it explicitly clear that the Federal Reserve cannot and will not step in to bail out non banks.

Some have argued that the recent extreme volatility in global markets and the economy as a whole have heralded the end of the period called the "Great Moderation," a time of resilience for the U.S. economy that began in the mid 1980s.

During that period of no major economic upheavals, the Federal Open Market Committee under former Federal Reserve Chairman Alan Greenspan set interest rates at historic lows in the early 2000s in order to spur economic growth as the country entered a brief recession. However, those low rates are seen as the breeding ground for the housing crisis, as the low rates

That period of low interest rates, enticing banks to make loans was a "pretty significant" mismanagement, Allison said.

For the FDIC, Allison argued that while many people consider the agency and its purpose of keeping the banking system stable a good thing, in his experience "it creates a lack of market discipline."

Specifically, he listed several FDIC programs, like option Adjustable Rate Mortgages known as "pick-a-payment" mortgages that contributed to the housing crisis. They allow borrowers to, in a difficult month; make very low minimum payments that don't even cover the interest for the loans. However, the difference is added to the mortgage balance, making the payments jump.

In those mortgages, which were popular in states like California and Florida hardest hit by the foreclosure crisis, FDIC insured banks could make the mortgages.

Overall, Allison expressed his concern for the public perception of free markets as the government intervention continues.

"For me the thing that I'm really worried about is the endless attack on free markets," he said. "This perception that capitalism has failed has huge long-term effects for the markets."

"What we really need is less regulation not more," Allison argued.

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