Rob Holland is a partner in Creo Capital Partners, a Los Angeles based provider of capital to middle-market companies. He has over a decade of experience in entrepreneurship, operations, investment banking, and principal investing and participates in all facets of the Firm. Mr. Holland previously worked at Trust Company of the West in the leveraged finance investment group, and as an investment banker at Lehman Brothers where he focused on M&A and capital raising transactions in the business services, engineering and construction, and real estate industries.
Mr. Holland graduated Magna Cum Laude from the Calloway School of Business and Accountancy at Wake Forest University, where he attended as a Presidential Scholar. Mr. Holland serves on the boards of Excelline Food Products, Filet of Chicken, Sataria Logistics, and Good Harbor Seafood. He also serves as a board member of the Southern California Chapter of the Turnaround Management Association (TMA) the Young Alumni Development Board of Wake Forest University. He is an avid private pilot.
The Noble Profession of Business
By Rob Holland
Earlier this year, I had the opportunity spend some time with former PepsiCo CEO and Dean of the Wake Forest Schools of Business, Steve Reinemund. I was anxious to engage with Reinemund on an important and relevant topic given his real-time exposure to the rising stars of the business world: I wanted to know what impact the “Occupy Wall Street” movement had had on business school students. Were the students still as eager as I was – nearly a decade ago – to pursue careers in business given the PR attack that the profession had suffered in the past year?
Reinemund was quick to respond with an anecdote about a “superstar” business school student who had recently developed apathy toward her school work. Having been influenced by the growing negative public sentiment toward capitalism, she had developed feelings of guilt and embarrassment about pursuing a career in business. She had lost the desire to be among those that the world seemed to believe were full of greed and corruption. Apparently, at one of nation’s top business schools, students were becoming ashamed of the very profession that they were pursuing…the protesters enjoying their desired effect.
So what is behind this onslaught of negativity toward business? While the “occupiers” of Wall Street have been anything but clear and concise in their demands, I have identified a handful of recurring themes amongst those that disdain capitalism. Most of their grievances are tied to misnomers and myths that deserve a clear debunking:
Five Myths about Capitalism, Wall Street, and Corporate America
MYTH #1: Corporate profits are driven by greed and benefit the elite
“Greed” is the new buzz word that haters of capitalism love to liberally apply to those that support business. Like “racist” or “bigoted”, greedy is a strong word that should be reserved only for true offenders. But unfortunately, opponents of business seem to slap the “Greedy” label on any business, individual, or institution that promotes free enterprise.
But, are corporations really greedy? Sure, there are those cases of clear greed, fraud, and misrepresentation – the likes of Bernie Madoff – that taint the image of Wall Street. But corporations are not greedy when they seek to generate a profit; that is what they are designed to do. Further, most of the profits that they generate accrue to the benefit of the average American. In fact, over 60% of the public stock of America’s top companies is owned by mutual funds and pension funds, whose ultimate beneficiaries are firemen, teachers, and individual investors seeking to maximize their personal savings or retirement accounts. Another 20% is held by banks, insurance companies, and other investment firms whose profits also accrue largely to individual investors and customers. In fact, less than 5% of the public ownership of America’s largest companies is held by elite insiders and executives.
So, when America’s largest companies generate that greedy profit, its America’s working-class backbone that enjoys most of the financial reward.
MYTH #2: Corporate profits are excessive
Despite constant press that would indicate otherwise, corporate profit margins in American are actually quite modest. In fact, on average, America’s largest companies generate net profit margins of just 12%. That means for every dollar collected in sales, 88 cents goes to pay employees, vendors, taxes, and other operating expenses. Only 12 cents on every dollar is retained as profits, and much of these proceeds are distributed to investors in the form of dividends, or reinvested into the business to fund growth and innovation.
MYTH #3: Corporations don’t pay their fair share in taxes
Much ado has been made recently about large corporations that have paid little or no federal taxes. As usual, the complete story has remained untold in favor of achieving striking headlines. The fact is America’s corporate tax rate is amongst the highest in the world. As a result, American companies are incented to move operations – and their associated profits – to other countries where taxes are more favorable. Many executives have been public about their desire to return these operations back to the US. But until US corporate tax rates are adjusted, there is little incentive to do so. Sure, GE paid no US taxes in 2010, but it has paid over $23 billion in taxes around the world from 2000 to 2009. With proper reform, future taxes could return to the coffers of the United States.
Further, in recent years, large corporations have recorded massive losses in their investment portfolios. These losses have carried over into current years, eliminating current-year taxes. Several large banks, for example, also paid no US Federal taxes in 2010 despite modest pre-tax profits. But they drew off their “bank” of losses from prior years that will eventually be depleted.
MYTH #4: Excessive CEO pay is at the expense of the rest of the workforce
Many of the occupiers seem to be upset – possibly jealous – of the chief executive pay at America’s largest companies. Sure, the $6.7mm in average CEO cash pay for America’s top companies seems extraordinarily high. And, there are select cases of CEOs of failed companies that have been paid more than they deserve.
But overall, successful corporate executives are highly sought after in a competitive marketplace. Like professional football players can do for their team’s winning record, an outstanding CEO can drive shareholder growth well in excess of his salary. And high CEO pay hardly comes at the expense of a company’s other employees. In fact, if all Dow-component CEOs had taken only $1 in pay in 2010, forfeiting the balance to the other employees of their respective companies, the average employee payroll would increase by a mere $4.91 per month.
This is a country where when you make it to the top, you can earn a fortune. Actor Leonardo DiCaprio made a reported $50mm for his role in a single film. Star football player Peyton Manning makes over $11 million a year. World-renowned chef Thomas Keller earns a similar amount. Love snow boarding and think you can make it to the top? Expect a seven-figure salary for that profession’s top performers, too. Bottom line, in this country, if you work hard, stay true to your determination, and reach the top of your profession, you will be well-compensated. Can we all say “God Bless the USA!” to this?
MYTH #5: Wall Street caused the “Great Recession”
This, of course, is perhaps the greatest “myth” of them all. Concluding that Wall Street caused the great recession is akin to claiming that it was the iceberg alone that sank the Titanic. Sure, if that infamous block of ice hadn’t been there, the ship might not have sunk. But aren’t some other major factors at fault as well? The foggy weather, the sleepy watchman, the arrogant captain, and even the slightly out-of-spec rivets used to construct the giant ship were all ultimately blamed in the tragedy.
Sure, Wall Street played its part in the recession and deserves its fair share of criticism. But, like all other market crashes, the recent recession was the result of a complex web of domestic and international government policies, economic conditions, excessive worldwide “paper wealth,” and other factors both known and unknown. One could make a very strong argument that government policies and institutions played a bigger role in the calamity than the Wall Street banks.
To summarize on this topic of blame, I share a few thoughts with the Wall Street protesters:
One, when busts happen, there are often a multitude of factors to blame. Cases of clear fraud should be scrutinized. But, blaming a certain and specific group of investors or institutions is simply assigning a scapegoat to an otherwise highly complex web of factors.
Two, ask yourself, were you completely innocent in the whole affair? Did you take on debt that you knew you couldn’t repay? Did you buy a house that you knew was bigger than your budget? Did you encourage others (clients, family members, etc.) to participate in the real estate investing game over the past decade? I have limited sympathy for the local realtor who lost everything on the three condos that she bought on “spec” in hopes for a quick profit.
Three, like it or not, regulate it or not, this will happen again, and again, and again. Markets are cyclical. Booms happen and busts happen. Don’t forget the tulips…
IN THE END, the profession of business is indeed noble. Business people are job-creators, innovators, and value-creators. They are also our communities’ largest philanthropists. Adherence to only the highest level of ethical and moral standards is paramount for our future business leaders, but so too is respect, admiration, and support from their communities and government leaders. Our country’s elected officials need to stand in firm support of business, and the People must do the same.
As for the students at Wake Forest, I hope that all of those with the determination and desire to pursue this noble profession will do so in earnest, and I will respect and admire them greatly for it.
The John Allison Interview
John Allison is the retired CEO and Chairman of the Branch Banking & Trust Corporation, based in Winston-Salem, North Carolina. Under Mr. Allison’s leadership from 1989 to 2009, BB&T grew from $4.5 billion to over $152 billion in assets to become the tenth largest financial institution headquartered in the USA. Almost more impressively, while many banks failed or received bailouts during the recent financial crisis, BB&T remained healthy and profitable. Mr. Allison is currently Distinguished Professor of Practice in the Business School at Wake Forest University.
The following interview was conducted by Stephen Hicks, Professor of Philosophy and Executive Director of The Center for Ethics and Entrepreneurship at Rockford College.
Hicks: Where did you grow up?
Allison: I grew up in Charlotte, North Carolina but I moved between the 10th and 11th grades to Chapel Hill, and graduated from high school in Chapel Hill.
Hicks: When you were young, did you think you’d become a banker?
Allison: Not at all. I was interested in economics in high school but not in banking, per se. I thought I would work for a railroad and maybe be a railroad engineer.
Hicks: You went to college at UNC-Chapel Hill—what did you major in?
Allison: That’s a funny story. All through high school I was told by my teachers that I ought to go into engineering because I was good in math. So when I went to sign up at UNC, they asked me, “What you would like to major in?” I said, “Engineering.” And they said, “Well, we don’t have it.” I said, “What do you have?” They started down the list and when they got to Business Administration, I said, “I’ll take Business Administration,” having no idea what that meant.
Hicks: Did you grow into it and enjoy it?
Allison: I did. I was very fortunate because I was really interested in the business courses. They were much more interesting to me—even though I liked things like history and math.
Hicks: After graduation, you went to work at BB&T. Why that company?
Allison: Partly, I guess, by chance. I knew I wanted to get into banking. I interviewed with several banks. At the same time, I thought I was going to work in banking for a couple of years and go back to law school. I saw a connection between law and banking in the back of my mind. BB&T was to some degree more convenient as the headquarters weren’t that far away. It was a small organization where I thought I might make more difference in the short term, with going back to law school in the back of my mind.
Hicks: How big was BB&T then?
Allison: When I went there it was $300 million in assets.
Hicks: While working, you also went to graduate school at Duke for your MBA?
Allison: I really liked banking and I did enough with lawyers to know I wouldn’t enjoy being an attorney. I decided to go back to graduate business school. I went to Duke, frankly, mostly because Duke gave me a stipend that helped me pay for it. I went to the full-time daytime program and still worked part-time and commuted from Wilson to Durham. It was about an hour-and-a-half commute. And then after the first year I needed more money. So I went back to work full-time for the bank and finished up in the evening program at Duke. It was tough.
Hicks: Over the next sixteen years, you performed a variety of jobs at BB&T. Were you following a standard career path at this point?
Allison: When I joined the bank it was so small there was no career path. Even though I went into a “management development” program, they just kind of shuffled you around in jobs. I was a teller and I worked as a bookkeeper, those kinds of things. I would call it both opportunistic and driven by a commitment that I made early in my early career. My objective was to do whatever I did better than anybody had ever done it, to enjoy it while I was doing it, and to see the connection between what I was doing and the rest of the organization.
Hicks: Then you were appointed president of the bank in 1987. You were relatively young at that time—39.
Allison: Yes, very young. When I joined the bank it was very behind. And it had kind of a vacuum in that there were a number of older people there, there were only a few people in the middle-aged group, and they were finally hiring some young people. In 1980, we had an unintended revolution, for lack of a better word. There was a president, a very nice person, and he had two guys reporting to him, one of which was very incompetent and very hard to get along with. The president wouldn’t deal with that issue, so several of us confronted him, but it really wasn’t intended to be a confrontation. We told him we could not stay unless he fixed this problem. And to his credit he did something about it. He created an executive management team that included a number of us younger people, in 1981. I was 33. The presidency came out of this informal revolt.
Hicks: Come 1987, what did the BB&T board see in you that led them to select you as president?
Allison: I think I had the ability to communicate a vision. The banking industry had been very stale for a long period of time. When interstate banking comes along in the early 80s, the industry starts going down a much more rapidly-changing path. We were deregulated in certain aspects; we were more regulated in other aspects. But I think I was able to communicate to the board clearly what we needed to do. I think they appreciated that.
Hicks: Two years later, at age 41, they appointed you CEO and Chairman. What led to those appointments?
Allison: It was an unfortunate event. My predecessor died suddenly. He had a heart attack and so the Board had to choose a successor. Of course they could have chosen to go outside, but they did choose to give me an opportunity to be CEO.
Hicks: How big was BB&T at this point?
Allison: It was $4.5 billion in assets.
Hicks: BB&T experienced explosive growth under your leadership. What were the major growth areas?
Allison: We grew on a number of fronts. On one front we did lots of mergers and acquisitions. In the late 80s and early 90s there was a huge shakeout in the thrift industry. I think two out of three thrifts in the U.S failed.
We identified that the thrift industry was a bifurcated industry. There were unhealthy thrifts; they had been poor credit intermediaries. There were a number of healthy thrifts that had stayed in the traditional bread-and-butter home loan business and had a lot of discipline.
The other thing we decided to do was grow rapidly in the insurance agency business. Today we’re the sixth largest insurance distributer in the world. We built that from one agency in eastern North Carolina, and that became a real strength of our organization, although we went through a long learning curve on how to master the insurance business.
Hicks: How did the typical merger come about? BB&T actively researching opportunities? Other banks being put up for sale actively?
Allison: We were very successful in the merger and acquisition business partly because we were very process-oriented, but mostly because we focused on the human systems. We did a very systematic analysis of our potential acquisition candidates. We started looking first at the economics: Would this be a good economic fit?
And secondly we started a careful study of cultures: would this organization fit with our culture? There were companies that were well-off economically but we thought the cultural transition would be too much. We took those companies off of our list.
We developed the best reputation in the industry for mergers and acquisitions because of how we handled the post-acquisition process. We came to a conclusion based on our own culture that you aren’t really buying the loans and deposits; it’s really the human system that matters. So we focus a lot on the human systems.
Hicks: In 1995 BB&T merged with the roughly equal Southern National Corporation, which means you doubled in size. What was that experience like?
Allison: That was a very interesting merger. It was a merger of equals of two companies that were about $10 billion each and had about the same number of employees. It was by far the hardest merger to execute but economically it was the best merger in our history. The way it worked economically is we had a lot of overlapping operations so there were huge cost savings. The dilemma was that the cost savings looked like lost jobs, which is a challenge to deal with.
The way that worked is we were going to get the best person for the job. But, in truth, in a large organization there are a lot of ties, i.e., equally qualified job candidates. Where there were ties, we were going to try to create balance. And we would do that partly structurally, by where we geographically located operations. Because, practically speaking, many people aren’t going to move. So, we ended up with three operational locations that helped deal with the ties and for people that wouldn’t move.
Ten years after the merger, we went back and measured how many employees from Southern National were still working for BB&T, and how many employees from the original BB&T were still working for BB&T. It was almost exactly the same number. So, we had kept our agreement and employees know that.
Hicks: As BB&T grew, did managing large numbers of people come naturally to you, or was it something you had to work at?
Allison: It’s something I worked really hard at. I am naturally mathematical, analytical. I discovered something very early in my career that became very valuable to me. And that is, unless you just want to be a technician (which is fine if that is what you want), you’re going to have to leverage other people to be productive. I had an interesting early work experience. I had been with the bank for three or four months, and I had a secretary I was working with. She was a young lady just out of high school. I was very “productive”—I was dumping a ton of material on her. And one day I walked out to her desk with a big pile of stuff, threw it on her desk, and she looked at me and said, “I’m not doing this.” I don’t remember exactly what I said to her, but in my own mind I said, “Holy mackerel! I can’t type very well and she won’t do this. I’m not going to get the job done.”
I made a resolution that I had to help her be more successful in her job if I was going to be successful in my job. And that if I did that, maybe she would take a lot of stuff off of me over a period of time that I didn’t want to do. So instead of just dumping stuff on her, if I could help her, train her up, control the work load and also get her more vested in what we were trying to get accomplished here, instead of just being work, give her a sense of purpose out of it, we would have a bigger success.
Hicks: BB&T has a strong corporate values philosophy. How did you make it a living part of BB&T’s culture rather than just nice words on a website?
Allison: That’s a great question. This was an evolution process. Some of the philosophy was always there, but there were aspects of it that were very inconsistent. And we were a very paternalistic organization early on in my career. This was dangerous because we would tolerate non-performance.
BB&T chooses to invest very heavily in employee education. We operate our own university. For every job category, like a teller, we have a certification process. In the certification process you get the technical skill. But you also understand: how does this apply to our philosophy and how does our philosophy apply to your job? In other words, given BB&T’s philosophy, how do you react with clients? It’s not just, “Here is how you push the buttons.” Obviously, the level of intensity varies with the complexity of the job but it’s built into all our training processes.
It is hard and easy. Easy, in the sense that we are a principle-driven organization. You have to be willing to live consistent with your values. For example, we had some high performers in terms of production who violated our philosophy—we fired them. We have fired people who worked for us for 25 years who did something that was against our values. They knew it; they were fully warned. I hated it on a personal level. They weren’t bad human beings but we had fundamental principles. I always thought if we tolerated a person violating our values, what’s the message it sends?
Hicks: During your tenure, there were many revolutionary technological changes in banking and finance—computerization, ATMs, credit and debit cards, online banking. Did that factor in BB&T’s growth?
Allison: This is an issue that we struggled with a lot. If you look at BB&T, we were a very innovative organization: we figured out how to acquire savings and loans; we figured out how to get into the insurance agency business; we developed learning systems; we developed a unique culture.
However, I did not believe, in our business, that being a technological leader is an advantage. Almost nothing is patentable in finance, you can replicate the competitor’s technology, and you can typically replicate it better if you wait a little bit. So we had a conscious strategy to be a close follower in technology. We would let Bank of America spend a ton of money on some new technology, get it up to the point where it’s ready to work, and then we would try to pass them. We might introduce it a year later.
Hicks: In 2004 you put BB&T’s growth on hold. Why was that?
Allison: One of the things BB&T had been doing was investing very heavily in leadership development. Each year we hired a top group of people out of good colleges and universities, had a leadership development program, and trained them up.
But we were doing so many mergers and acquisitions that, even though we had invested heavily in leadership development, we out-ran our internal investment in people. Also, we were to some degree outrunning our technology. We called it “indigestion.”
Hicks: After a few years of digesting, so to speak, by 2007 how big was BB&T?
Allison: BB&T was probably about at $135 billion.
Here is where an interesting thing happened. We got the chance to get back in the merger business in 2007. We did a couple of deals but most of our growth was still driven internally. The reason for that was—this goes to a fundamental discipline issue—we started running our mathematical models, and what had happened in the merger business was that the prices had gone up while the quality of the companies for sale was deteriorating. We would review our models and we chose not to do acquisitions.
We had many banks who wanted to sell come to us. However, we decided we could not even pay the current stock price for the companies much less a premium. A number of the large regional banks that had serious trouble early on in the financial crisis were companies that acquired these banks. They just paid crazy prices. It was hard on us, though, because at the time financial analysts wanted us to do mergers.
In retrospect, that seems easy. At the time it was hard because banks that were doing these acquisitions were actually getting temporarily rewarded in their stock prices. Analysts would indicate that’s a great deal in Florida; you can’t miss. But we had financial models that we developed. Over time, an operating concept we used was inspect what you expect. When we did mergers we provided a report to the board every year that outlined what we said we were going to do and what we did. So we knew that what our models predictions were right. The way financial models work, you can tweak the assumptions and have any outcome you want. We refused to fudge our assumptions because we knew we would just be misleading ourselves.
Hicks: From 1989, when you became CEO, to 2008, BB&T went from $4.5 billion in assets to $152 billion in assets. That is extraordinary. Did it seem outstanding to you as you lived it?
Allison: Yes and no. This is hard for some people to understand. We never had growth as an end in itself. I think companies get into trouble with too much focus on growth. We decided we were going to do everything we can that makes BB&T better. So we’re only going to do acquisitions that we believe will make BB&T a better organization. In a rapidly consolidating industry, however, there were lots of opportunities out there. We were experiencing extraordinary growth on multiple fronts: on the banking front and on the insurance agency front, exponentially, and some of our smaller businesses were growing very rapidly. So, in some ways it felt extraordinary.
But we had invested very heavily over a long period of time in quality leaders. They understood our culture, they understood our value system, and we evaluated their performance and promoted them very carefully. We were able to allow those people to have a huge amount of relative autonomy.
One reason we had a lot less credit problems in the financial crisis (not that we didn’t have problems) is we had much of our authority in our community banks. We had better information, and that’s non-trivial. The community bank presidents also were held very responsible; they owned the process. As the company got bigger, I gained the ability to focus on culture and strategies that flow from that culture and reinforce the process, instead of managing the day-to-day operations.
Hicks: Successful people typically are very good at learning from mistakes. Looking back, did you make any significant mistakes?
Allison: Many, many mistakes. The ones that mattered and hurt the worst were misjudgments of people, where I thought somebody either had better character or was more competent. Early in my career, a man I really had a high regard for and considered a good friend embezzled from the bank.
I tell this story as a concrete example; it’s an interesting story. Early in my career I was primarily a farm lender and BB&T was mostly a farm bank. I had made a number of big livestock loans. One of those loans was to a large hog operation.
We had this client who had been successful but, even during his success period, he did some things that I really should have paid attention to—character-related actions. Times got tough in the hog business. One afternoon, he walks into my office and slams down this big wad of keys and says, “Son, they eat at five,” and he leaves. This is at 4:00 in the afternoon.
I got in my car and drove down to this hog operation, as if I knew what the heck I was doing, with nearly 10,000 pigs. I’m driving around and looking at the pigs, thinking, “What am I going to do?” Then it dawned on me that the owner didn’t actually feed the hogs; somebody who worked for him fed the hogs. So I ask around and somebody at the filling station said whatever-his-name-was down the road feeds the hogs.
So I drive down to “Tom Brown’s” house and knock on the door and say, “Tom, are you the one who feeds the hogs?” He said, “Yeah.” I said, “We need to get the hogs fed. Would you do that?” He said, “Hell, no!” And I said, “Why not?” He said, “They didn’t pay me.” I said, “How much do they owe you?” I can’t remember what it was $100, $200. So, fine, I wrote him a personal check. “Go feed the hogs.”
The learning experience was that character is huge and if character deviations are happening in good times, they’re going to be really bad in bad times. So if you get any character warnings, don’t ignore them.
You lend money to people. Yes, the mathematics matters, but character is more important. The man who embezzled from the bank was the same kind of story in that there were signs that I ignored because he was a friend of mine. You can’t do that.
Hicks: Your career is focused on money and, as you know, our culture has wildly different evaluations of money—from seeing the love of it as the root of all evil to seeing it as a wonderful invention that facilitates production and trade. What do you think about the moral status of money?
Allison: In a broad context, in a free market, money’s a good thing, in the sense that it is an identifier of productive economic activity.
However, I think there’s a little truth in the criticism of money in this sense: Some people think that money is the end of the game; money is an end in itself. Money is not an end in itself. Money can be a means to an end. And as a feedback mechanism, it’s a very valuable tool in a free society. One of the problems is we aren’t in a free society, so you’ve got some manipulation where people (i.e., crony capitalists) get money that is not earned.
Money is a good thing in a fundamental sense. But it’s a means to an end. The end is happiness in the Aristotelian sense of a life well-lived. Money is a just reward for productive work, but it’s in the context of the pursuit of happiness.
Hicks: In the wake of the Supreme Court’s 2005 Kelo decision, BB&T received a great deal of publicity about its decision not to do mortgages for deals that involved eminent domain. What was the reasoning behind BB&T’s policy?
Allison: In a certain sense this was a hard and an easy decision, which our board unanimously endorsed. It was a hard decision in that we were worried about the economic consequences, in that we do business with a lot of municipalities that use eminent domain, and we knew that some would move their business from BB&T. On the other hand, given our value system, we simply could not in good conscience finance one individual using the government—the power of a gun—to take property from another individual. We couldn’t finance a big box retailer throwing some poor little old lady out who didn’t want to sell her home. If she wanted to sell it, fine. But the government taking your home is inconsistent with a free society, it’s inconsistent with the principles that underlie property rights, and it’s inconsistent with BB&T’s belief system. I couldn’t look my employees in the eye and tell them that we were going to do that.
Now here is an interesting thing about what happened. While we were worried about the economics, it turned out to be a home run for us. We did lose a few municipalities, but we had thousands of people move their business to BB&T. It was an unexpected reward. And a lot of people said, “Look we’re so happy to see a business that operates on principle. Businesses will do anything for a buck and you obviously made a principled decision and I want to deal with an organization that makes decisions based on principles.” It was great. It was uplifting.
Hicks: Turning to the 2008 crisis that devastated many major financial businesses. BB&T weathered the crisis well. Was that because you and other BB&T leaders saw trouble coming and prepared for it, or because BB&T was sound and able to adapt quickly or ride out the storm?
Allison: I guess some of all. We knew the market was frothy. We also had always run a sound bank. But primarily it was because of our culture. Our value system enabled us to avoid a lot of the problems that other banks got into. And because of that we weren’t doing a lot of things that some other people were doing.
Hicks: One of the factors was BB&T’s decision not to underwrite marginal mortgages?
Allison: One of the most important products we avoided was called the negative amortization mortgage or the “pick-a-payment” mortgage. The pick-a-payment mortgage was not a true sub-prime mortgage. It was actually targeted towards young people who had high income potential in the long term. It enabled them to leverage themselves up in the real estate market.
A simple example: if the interest expense on a mortgage was $1000 a month, in a pick-a-payment mortgage you only had to pay $500 dollars a month. So every month you owed more on the mortgage. But the big factor is you could qualify at the minimum payment, at $500 instead of $1000. So you could buy a much bigger house. These mortgages were very popular in fast-growth markets where the theory was to buy as a big a house as you can, and in five years refinance it. You’ll owe more but the house is going to appreciate. We didn’t foresee the demise of the real estate market near the magnitude that did happen, but we knew home prices after appreciating for many years were not going to appreciate at 15 percent for perpetuity. And we knew that we would be setting up a lot of young people to get in trouble if we made negative amortization mortgages.
One of the fundamental commitments in our mission is to help our clients achieve economic success and financial security. We believe in the trader principle: value for value. We have a moral obligation to help you be successful and I expect to make a profit doing it. I might be wrong, but I’m never going to make a decision that I believe is bad for my clients, even if I can make a profit in the short-term, because it will always come back to haunt me. So, at the time we could originate and sell these mortgages, and they were very profitable on the surface in the short term, and we were criticized for not doing it.
But here’s an interesting thing. I didn’t personally make that decision. The man who runs our mortgage department, Tim Dale, made that decision because he understood the culture at BB&T. He believed that pick-a-payment mortgages were not consistent with our values.
We had mortgage originators who left us and went to work for Countrywide. We were glad they left in the sense we do not want people working for BB&T who are not committed to treating our clients fairly.
But you can’t absolve the clients of moral responsibility, either. We had plenty of clients who came in and we told them this is a bad product for you. And they said they wanted to buy a bigger house—I’m going over to Countrywide! Now they’re broke and they deserve it. I do think Countrywide outsmarted some people, but on the other hand there were a lot of consumers who consciously made this decision and should have the negative consequences.
Hicks: Even though BB&T was financially healthy, it was required to participate in the federal government’s Troubled Assets Relief Program (TARP). Why was that?
Allison: I was personally adamantly opposed to TARP. Particularly—this is a little complex—as it was originally presented. I thought saving unhealthy institutions was bad for the economy in the long-term. I was the only CEO of a large financial institution who wrote Congress, actively lobbied against TARP, met with Congressmen, etc. I failed, obviously.
The day after TARP passes we got a nice call from one of our regulators. They would say they said something different than this, but this is really what they said. In bureaucrat-ese they said: “Look we’ve had these capital ratios for banks for 20 years, and you guys have way more capital than you need by these ratios. But we have decided, under this current environment, we need new capital ratios. We don’t know what these new capital ratios are going to be, but we know that you don’t have enough capital under these ratios unless you take the TARP money, and we’ve got an audit team ready to come in to audit you unless you take the TARP money.” We said, “Please send us the TARP money.”
It was a rip-off, by the way, for healthy banks because we had to pay a high, above-market interest rate, and the government took warrants in our stock, and we didn’t need the money. Of course, they came back in and did the “stress test” and decided we were already properly capitalized.
Hicks: After seeing BB&T through the crisis, you retired at the relatively young age of 60. What led to that decision?
Allison: There are two reasons, one from an organizational perspective and one personal. Organizationally, I have observed a number of very successful, long-tenure CEOs where the organization did very poorly after they left. I think a CEO ought to be judged five years after they leave. One of their obligations is to have a succession plan so there is reasonable probability the company is still going to be doing good for five years because of the people they put in place. So I felt a moral obligation to help ensure BB&T’s success after my retirement.
Five years before I retired we put together a conscious plan and talked with the board about it. We brought in new members to executive management who were younger, yet who had been with BB&T a long time, were proven managers, had largely come out of our management development program, but were the next generation. One of our team wanted to stay, my successor Kelly King, which worked well for everybody. We just executed that plan.
Now on a personal level, this was good for me. I truly loved the job, but being CEO for 20 years you run a risk of becoming arrogant even if you try to fight it. I felt like I would enjoy doing something different that took me out of my comfort zone and, as exciting as the CEO job was, I could visualize being interested in other things and excited about other things. I told people while I was technically retiring, I didn’t think of myself as retiring—I thought of myself as changing jobs. In fact, my wife says I flunked retirement, and that’s fine. I wanted to do something different.
Hicks: Looking back, what was the best thing to you personally about being CEO of a top ten bank?
Allison: Well, the process of building a business is great fun. It was enjoyable having a vision and seeing the creation of that vision. On a personal level I really enjoyed seeing people grow and be fulfilled in their work. I saw some people do jobs they never would have expected they could do, and do them extremely well. I felt like maybe I’d helped them do it.
Hicks: What was the most challenging thing for you about being CEO of a top ten bank?
Allison: For me the regulatory environment was always difficult because, not only was it a problem practically, philosophically it was a deeper problem. I felt like we were constantly being forced to do things that were economically destructive in the name of “politically correct” dysfunctional ideas. There was a huge waste of resources in the economy and a huge waste of resources in our industry, driven by policies that sounded good where people did not understand the consequences. The power-lusting of regulators was very difficult to deal with.
Hicks: What is next for John Allison? What projects are you working on?
Allison: My passion is defending individual rights and free markets. I’m trying to do that in a number of ways. I’m trying to do it educationally by teaching students here at Wake Forest University. I speak a lot on other college campuses about Principled Leadership, which is really the values that individuals need, which are also the same values that will lead to organizational and societal success.
I’m writing a book on the financial crisis that tries to both show how it happened and also focuses a lot on philosophy. The economic mistakes were driven by destructive philosophical beliefs.
Hicks: Going back to your college years, in retrospect what did you learn there that was most helpful to you as leader of a major bank?
Allison: Understanding the technology of business and specifically the technology of finance was absolutely necessary. I don’t think it was anywhere near sufficient. But I did learn a lot about business technology and the language of business, which was necessary for my career.
Hicks: Is there anything your college education could have better prepared you for?
Allison: In business school, they didn’t really teach us much about working with human beings, motivating them. They didn’t talk about purpose and passion. It was much more technical. We can do a better job on how to motivate human beings to produce better results.
Hicks: In closing, what advice would you give to young people just starting out in their careers?
Allison: My first advice would be to read Atlas Shrugged. This will give them context for their college experience. They’ll have some really good professors and they’ll have professors who are not very good. Just because they’re professors doesn’t make them good. The students have to develop their own judgments of whether this person is giving them the right information and taking them in the right direction. Students must think independently and challenge the professors to prove their positions based on the facts. You must think for yourself.
And the other big thing that they need is to be clear about is developing a sense of purpose as early as they can, and the purpose is not just to get through college. If your end is to get through college, you might just care about your grades instead of learning. If you are in college to do something you consider important, you’re going to care a lot less about your grades and a lot more about learning. You’re going to approach every course differently. Your good professors will get that and they’ll help you. Your bad professors won’t care and you’ll know who they are. So, it’s having a sense of purpose that drives beliefs that drives behaviors that produces superior results.
The above interview is reprinted here with permission of Kaizen, a publication of The Center for Ethics and Entrepreneurship at Rockford College. Please visit their website at http://www.ethicsandentrepreneurship.org/kaizen/
For more information on Professor Stephen Hicks and his publications, please see http://www.stephenhicks.org/