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

accounting—newfangled accounting rules imposed on banks for the first time several years ago, requiring them to appraise their investment positions based on transitory mark-to-market prices rather than independent analysis of value.
    â€œThat sounds good,” Allison admits, “but there are times when you can’t mark to market because you can’t figure out what it is. And fair-value accounting violates the basic laws of supply and demand. For there to be a market price there has to be a willing seller and a willing buyer.” 11 In the mortgage crisis of 2008, there were no willing buyers or sellers of so-called toxic assets—and the fire-sale prices that resulted from what few trades were done gave an unrealistically low appraisal of these assets’ worth.
    Fair-value accounting violates the principle of “going concern,” Allison says, “because it assumes that everyone has to sell assets when they don’t have to sell assets.” 12
    Allison thinks this was “a major cause of the liquidation we had” 13 because banks like BB&T weren’t willing to take the accounting risk artificially imposed on them by fair-value accounting. If they’d stepped forward and bought the toxic assets that were being sold by distressed banks, they’d have to show on their books large losses if those assets subsequently traded at unrealistic fire-sale prices, even though they knew to a moral certainty that they were worth much more. Without fair-value accounting, it would have been just the opposite. They could have booked immediate profits by buying assets on the cheap—and in doing so, they would have supported a market that was desperately looking for buyers.
    There was another failure of independent thinking that contributed to the mortgage crash: the overreliance on the three rating agencies, Standard & Poor’s (S&P), Moody’s, and Fitch. Allison calls them “a government monopoly,” 14 and blames their too-optimistic ratings of mortgage-backed securities for helping to transform problems in the small market for subprime lending into a large-scale systemic banking crisis.
    When mortgage-backed securities that had been rated investment grade suddenly became toxic assets, the market “totally lost confidence in the ratings system.” In other words, a market that had not done any independent thinking (it had just relied on S&P, Moody’s, and Fitch) suddenly had nothing to go on. “So we had a real lockup in liquidity,” Allison says, even in “instruments that really were performing . . . because nobody trusted the ratings system.” 15
    Value #4: Productivity
    Rand’s character Francisco d’Anconia expressed it this way: “. . . there’s nothing of any importance in life—except for how you do your work. Nothing. Only that. Whatever else you are will come from that.”
    Okay, maybe that’s a bit much. For Allison, BB&T is looking for high performers who have “a gut level commitment to getting the job done.” 16 BB&T wants to filter out low performers who “seek reasons to fail.” High performers “face the same obstacles” as low performers, according to Allison, but they get over them and succeed.
    If the bank’s purpose is to produce shareholder wealth, then it has to produce profits. What are profits? Allison says they’re just the difference between the value BB&T creates for customers and BB&T’s cost of creating that value—“the bigger the difference the better.” 17
    The way you make that difference bigger is through efficiency and productivity. It’s really just that simple.
    Value #5: Honesty
    Honesty doesn’t mean just keeping your fingers out of the till. Any bank insists on that . With BB&T it’s an obsession with ethical conduct 24/7, complete transparency—not even a white lie, and no exceptions for the bosses at the top of the