“Mr. Smith, we’re with the Federal Dept. of Transportation. Please sign here for your free high-mileage tires.” “But I don’t need new tires. I just bought a set and they’re fine.” “Mr. Smith, sign for the tires or we will be forced to run a test to verify that your car meets our regulatory requirements. If you’re under 27 mpg it’s illegal for you to drive that car. You really wouldn’t want us to do that, would you?” “I don’t need your free tires, go ahead and run the test.”
One Week after Mr. Smith’s car passes the test: “Mr. Smith, we must insist that you sign here for your tires.” “I told you I don’t need tires and I passed your damn mileage test last week.” “That’s true but yesterday we raised the mileage requirement from 27 to 37 mpg and now your car doesn’t pass. If you don’t take the tires it will be illegal for you to drive your car.” “This is crazy! I can’t believe this is happening! Where do I have to sign?” “Here and here and also here where you sign over 40% ownership of your car to us.”
One Month Later: “Mr. Smith, here’s your route for delivering the mail.” ” “What?!! What could possibly make you think I’m going to deliver the mail for you?” “Mr. Smith, the new Citizen Mail Delivery Act we passed this week says that, if you took the tires, participation is mandatory. It’s the law and it says you will deliver the mail. After all, you did take the free tires.”
Far fetched? Maybe not so much….. two separate stories I ran across over the last week led to an interesting intersection. Both stories involve banks and our federal government.
I found out about the first story while watching author Donald Luskin hawk his book, “I am John Galt,” on BookTV. The book matches up the characters in Ayn Rand’s book, Atlas Shrugged, to real life people. The match that grabbed my attention was that of the novel’s main character, John Galt, to the former CEO of BB&T Bank, John Allison .
As well as being the CEO for many years, John Allison was the driving force behind the rise and success of BB&T. He was a devotee of Ayn Rand’s philosophy of “objectivism” and, as such, ran his company dedicated exclusively to excellence, innovation, and success. His philosophy gave great weight to the individual rather than the corporate structure. The company’s results confirmed this to be an excellent way to run a business.
During the boom years of easy money and the “if you’ve got a pulse you get the loan” mortgage market one of Allison’s middle managers came to him and suggested that making all these questionable loans might not be a good idea. Allison, the CEO of the company, changed the course of his entire company on the advice of one of his middle managers! BB&T returned to the traditional lending practices that had served them well for so many years and ignored the so-called “easy money.” Because he took the sound advice of a middle manager BB&T was relatively untouched by the collapse of the housing market. A happy ending, right? Enter the government.
During the bank bailout mania federal regulators came to Mr. Allison and asked him to sign the paperwork for BB&T to receive their TARP bailout funds. He replied “No thank you” telling them his bank was just fine and didn’t need the money. They again strongly suggested that he take the money. He again told them he didn’t need it and wouldn’t sign. They then told him they would have to run a “stress test” on his bank to verify that it was healthy. For those of you unfamiliar with a “stress test,” regulators create an imaginary scenario of bad conditions and then project how a bank would survive (or not) under those stressed conditions. This was a veiled threat but Allison would not submit and told them to go ahead and run the test. They did and the bank passed with flying colors.
Shortly thereafter the regulators returned and again put the paperwork in front of Mr. Allison and told him he must sign. He again told them he did not need the money and reminded them that the bank had just passed their stress test. They then informed him that the bank had passed the stress test last Tuesday but, since then, they had changed the amount of capital they felt the bank had to have in reserve and now they didn’t pass. He was told he must sign the papers. Having no choice, John Allison signed the papers and then walked away from his life’s work a la John Galt. This was not an isolated incident. Under the Freedom of Information Act, documents have recently been released showing that, in a meeting of the Feds with 9 major bank CEO’s, they were told “If a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance.” All nine signed and, under obvious pressure, simultaneously issued multi-billion dollar amounts of preferred stock to the government in the same document. The government now owned large chunks of all the major banks.
The second story is about one of President Obama’s government plans to help those who are in danger of having their homes foreclosed on. The plan is fairly complicated, will add significant costs to banks, and forbids the banks from charging any administrative fees to cover those costs. Most significantly, according to the NY Times, “Banks that receive additional bailout funds must participate.”
Put these two stories together and it seems like the government basically took over the banks by intimidation to create their own “financial network.” They can now literally force the banks to “participate” in any hair-brained lending scheme they pass into law.
And, speaking of hair-brained schemes, does anybody remember who intimidated banks to make all those high-risk loans in the first place? Can you say “Community Reinvestment Act?”