This story appears in today’s Charleston Daily Mail.
By George Hohmann
Daily Mail Business Editor
If the federal government hadn’t overreacted to the 2008 financial crisis, “which whipped the country into a panic frenzy, we would have survived fine,” said Kelly King, chairman and chief executive officer of BB&T Corp.
“Several big firms would have failed, we would have had 30 days of anxiety, then we would have moved on,” King said. “We would have had a tough recession,” but not a catastrophe.
King delivered the keynote speech Wednesday at the Charleston Area Alliance’s Annual Celebration. More than 400 business leaders from the region attended the event at the Clay Center.
Given that the federal government did create a panic, “there were days you could see the whole system collapsing,” he said. “Given that we were in that situation, you had to step in. In that context, TARP (the $700 billion Troubled Asset Relief Program, which pumped money into banks, General Motors, AIG and some other companies) was a good thing. But it did not have to happen.”
Although TARP gave the banking business a black eye because people still refer to it as the bank bailout, “when the dust settles the whole TARP program may actually turn a profit,” King said.
The federal overreaction was unfortunate, King said, because “when you have a big panic and the government steps in, it so undermines the system. The system is built on confidence. Before this, we bankers were fairly well thought of. Right after this we were down there with the lawyers.”
In 2008 BB&T took $3.1 billion in TARP money. The company repaid all of it in 2009.
In a speech last year at the University of Charleston, John Allison – King’s predecessor at BB&T – said he adamantly opposed TARP but failed.
King said, “When (former Treasury Secretary Hank) Paulson said, ‘We’re going to give this money to healthy banks so they can make loans,’ the statement contained three inaccuracies.
- “It was not a gift,” King said.
- TARP wasn’t really for healthy banks. “They gave it to BB&T to disguise other,” unhealthy banks, he said.
- “For most of the good, healthy banks, all through the cycle, there’s not been a problem having capital, liquidity or willingness to make loans.”
In the early 1970s, when he started out in the business, the retail banks controlled about 80 percent of the loans made, King said. Recently that figure was 30 percent. “What happened to the 50 percent? They went to the ‘shadow banking system,’ a substantially unregulated system. That’s primarily what caused the problem.
“The banking system does a relatively good job of rationing credit,” King said. “We take in deposits, get requests for funds, approve the good investments – and get it right about 90 percent of the time. When 50 percent of the loans left the banking system, the new system did not work well.
“Loans were packaged into securities, the securities were rated by the rating agencies, and the Wall Street bankers distributed them all around the globe,” he said. “The problem was, the basic underlying securities were sub-prime loans. But through the miracle of securitization, they were rated Triple A. Investors thought they were low risk. They were sold at low interest rates. Billions of dollars of deals were done that should not have been done.”
When some of the underlying sub-prime mortgages began defaulting, “fear entered the market, people lost confidence,” King said. “The president and congressional leaders started talking about the banks,” and “it really got whipped into a frenzy in late 2008 and early 2009. “Then we had TARP. But the real problem was, these loans should never had been made. They would not have been made if they had entered through the normal banking system.”
If anybody wants to play the blame game, “there’s enough responsibility to go around,” King said. “Companies and individuals alike lived beyond their means for about 30 years. They under-saved, over-borrowed, created too much debt and there wasn’t enough productivity.”
King said there are two big takeaways from the Great Recession:
- “At the system level there was a complete failure in integrating and correlating information so we could really understand what was going on.”
- “Companies forgot about a truism in finance – they took on too much leverage and there was too much of a concentration in their investments.” Companies like Lehman Brothers and AIG, which failed, “had way too much debt, too much invested in sub-primes,” King said. “It’s a good idea not to borrow too much money and to be diversified in your assets.”
Prior to King’s speech, the Alliance honored the College Summit scholarship winners: Donavia Beltran and Ashley Pondexter of South Charleston High School, Roseanna Bradshaw of Capital High School, and Jacob Lutsy of Riverside High School.
Each winner received a $2,000 scholarship, a laptop computer and extras. The Maier Foundation and Generation Charleston support the scholarships.