Anti-Government Banker Builds Career on Government Subsidy

This weekend’s New York Times had a flattering Andrew Martin article on BB&T’s John Allison. I think it is joke for Allison to benefit from a huge government subsidy like FDIC insurance and at the same time, to present himself as anti-government/objectivist. His thought process is intellectually dishonest. He talks as though banks are purely private institutions and would still exist in their current form without FDIC insurance. I have news for him: banks exist today only because of the federal government provides backstop FDIC deposit insurance.

FDIC insurance is a large government subsidy program to help bankers attract deposits. FDIC insurance is critical to a bank because most of the value of a bank comes from its deposit base. With FDIC insurance, bank customers (depositors) are indifferent to the safety of the bank. Instead, depositors base their choice of banks based on rates offered, levels of customer service and branch locations. Without FDIC insurance, banks would have to run with much lower levels of leverage and much high levels of liquidity to attract deposits based on safety and stability. These measures would guard against bank panics or runs; however, lower leverage and higher liquidity would also dampen profitability for the bank.

Another beef I have with Allison is his blaming the housing crisis on Fannie and Freddie. It has been well documented that Wall Street led the credit bubble in the housing market with the expansion of the non-agency mortgage market, specifically the explosion in subprime and Alt-A lending. Fannie and Freddie lost market share from 2002 to 2007. If they were losing market share, how did their actions lead the housing market to its bubble status? See the series of articles on Univ. of Oregon Prof. Mark Thoma’s blog for a more complete discussion on how Wall Street led the mortgage market to a credit bubble. Allison’s blame of Fannie and Freddie seems like a convenient, popular position that fits into his distorted anti-government view.

If Allison truly wants to prove he lives his life abiding by Ayn Rand’s objectivist philosophy, he should have BB&T’s board vote to renounce the company’s bank charter. Then, we’ll see how long a bank run by an objectivist is able to maintain its depositor base and remain in business. I suspect the bank wouldn’t last long.