I Am John Galt by Donald Luskin, Andrew Greta Read Free Book Online Page A

sector, like it or not, all the government-induced distortions were reality. So in an important sense, the orgy of subprime lending that nearly destroyed the U.S. banking system was rational—it was an adaptation to reality. But that reality was, ultimately, an unreality. We’ll see shortly how the BB&T philosophy kept Allison’s bank from succumbing to it.
    Value #2: Reason
    Reason is a key value because it is the means by which we capture and hold the first value, reality.
    What Allison demands from his employees is what he calls an “active mind” 6 —a mind committed to learning from experience, profiting from mistakes, and being free from evasion. That’s the kind of mind that can discover reality and profit from it.
    Allison says, “The ultimate psychological sin we talk about is evasion. . . . I think everybody evades some; some people evade a lot more than others, and evasion is very dangerous. And the smarter somebody is, I think, the more dangerous an evasion is.” As Allison surveys the graveyard of once-great banks now laid low by their foolish and risky investments at the height of the mortgage bubble, he says, “I guarantee you people were evading like crazy.”
    In the bubble, a key means of evasion for the seemingly smartest bankers was mathematical modeling of the economy, the markets, and the riskiness of their investment positions. Models seem on the surface to be the height of reason—they are based on numbers and run on computers, and their outputs are beautiful graphs and deep decimal precision. But in the mortgage crash, they pretty much all failed—and in some cases took down the banks that used them.
    Allison says, “We were told over and over again if we just had mathematical models like Wachovia and like Bank of America . . . we would be wonderful from a best practices perspective.” 7 Thanks to the utter failure of their models to capture the true risks they were taking in the mortgage portfolios, Wachovia failed in mid-2008 (it was sold by the Federal Deposit Insurance Corporation [FDIC] to Wells Fargo), and Bank of America had to be rescued by extraordinary interventions by the Treasury and the Federal Reserve in early 2009.
    Has anything changed, now as we stand in the rubble of a model-driven banking blowout? Nope. “This is bizarre,” says Allison. “They still believe it. We’re still being told we need mathematical models like Wachovia’s. . . . There’s still a religious belief in mathematical models.” 8
    Allison thinks the models are doomed from the get-go because they are based on fundamentally incorrect notions. “They always assume normal curves, and they try to manage things to a 99 percent probability. That means there’s only a 1 percent probability that certain bad things can happen. Well, there’s an interesting thing with a 1 percent probability: Give it long enough, and it becomes certain.” 9
    Value #3: Independent Thinking
    Allison calls independent thinking “the most important psychological decision you can make, to be responsible for yourself.” 10 It’s the root of all creative achievement, and creative achievement is the root of all human progress—practically by definition.
    Have you ever worked for a bank? If you have, and if it wasn’t BB&T, chances are you weren’t encouraged to think independently. Quite the contrary. Indeed, banks are known for their hidebound conformist cultures. That’s why most banks haven’t grown like BB&T has, at least not without taking absurd levels of trading risk that came back to bite them in the mortgage collapse.
    At the same time as they were taking those absurd risks, most banks failed to think independently. It was a lethal combination—crazy risk taking and herd mentality—and it was imposed by fiat by banking regulators.
    Allison points a finger at so-called fair-value