Donald Luskin Read online

  For Allison himself, Rand resonated with his personal quest for meaning in life. He recalls, “Before Rand, first I had a hodgepodge of philosophical beliefs. I was trying to be religious, but I wasn’t really active in a way that was consistent with the religion that I was taught, so I was torn in a certain sense. I made pretty good grades, but I was just doing my schoolwork to make good grades. It didn’t have any bigger meaning to me. When I saw her characters, spiritually what I got was, man, they’re purposeful and they’re doing it in ways that I could enjoy—building a business.”

  Like Allison, the new leadership nucleus of BB&T were Southern-born and deeply religious. For some, Rand’s aggressive atheism didn’t sit well, and still doesn’t.

  Kelly King, who has succeeded Allison as CEO, recalls that he reacted favorably to Atlas Shrugged when he first read it at Allison’s request: “I kinda liked the book. I hate big government. I like capitalism. I like productivity.” But later, on learning more, he found, “I disagree with her need to take reason to its ultimate extreme, which of course defeats all forms of mysticism and faith. I don’t find that to be productive or necessary in business.”

  But Allison says, “Our agreement was to try to take religion out of the bank. This was a secular organization. People were entitled to their religious beliefs, but the bank had to be run by some secular principles. That’s the agreement with the shareholders of how you run the bank. . . . And they respected that.”

  The Man with a Purpose

  Allison became president of BB&T in 1987, and chief executive in 1989. He continued to spread the word about Rand and get everyone to read Atlas Shrugged. But the Randification of BB&T kicked into high gear in 1994. That’s when Allison discovered Objectivism: The Philosophy of Ayn Rand, written three years earlier by Rand’s longtime associate and designated intellectual heir, Leonard Peikoff.

  “Though I’d read all of Rand and agree with it,” Allison says, “I really, in retrospect, didn’t truly understand it. I understood its politics, and I understood parts of it, but I never was able to totally integrate it until 1994, when I read Objectivism: The Philosophy of Ayn Rand. And that was a huge integrating event for me, because I was able to really get it from A to Z.”

  For Allison “the timing was great,” because the next year came the seminal event in BB&T’s rise to dominance in the Southern banking market: the merger of equals with competitor Southern National Bank, handing CEO Allison the challenge of integrating two $10 billion giants.

  It was a classic integration problem: How do two proud business cultures come together as one? And the most pointed question: Faced with the inevitable functional overlaps between two similar businesses, who lose their jobs and who keep their jobs?

  The answer was Rand. After years of promoting Rand’s ideas in a general way within the bank, Allison turned them into a formal system. Most big businesses have a mission statement. But Allison took it much further. For BB&T, he used Rand’s ideas to create a corporate philosophy. It became embodied in a lengthy booklet that Allison wrote himself, and that still serves BB&T substantially unaltered after all these years.

  Allison got buy-in on the philosophy from his senior leadership team. Again, Rand’s reputation as an atheist was a sore spot for some. But Allison recalls, “They all agreed with the philosophy. And this is an interesting thing: Everything in that is, by the way, in the Bible. . . . So that’s how I think the group reconciled it—they were already living it.”

  As the Southern National merger proceeded, and then for all the years since, the Rand-based BB&T philosophy has been what Allison calls “a filter.” Not everyone accepts it, but the ones he wants in his bank do. “What I’ve found is that better people like the ideas.”

  Allison is especially good at getting people to like the ideas. Rand herself was good at it, too, couching the ideas in novels so compelling that they are still best sellers more than half a century since they were written. Yet as much as Rand and her ideas are admired by her readers, at the same time they are reviled by critics on both the political left and the political right who accuse her of advocating “greed” and “selfishness.”

  Those objections don’t seem to come up when Allison talks about Rand’s ideas in the BB&T philosophy. Maybe it’s his unpretentious North Carolina accent, his boyish wavy hair, the ever-present smile on his face, or his tendency to laugh as he speaks (he resembles a more slender David Letterman).

  Or maybe it’s that Allison exudes leadership. Meet this man, and you’ll wish he’d offer you a job—because you know instantly that he’s someone you’d love working for. It’s because he believes so utterly in his philosophy, because there is no internal doubt—because, like John Galt, his is a “face without pain or fear or guilt.”

  What is it like to have a philosopher for a CEO? Edward D. Vest, who rose up through the ranks to become BB&T’s chief financial officer, speaks of Allison more as a life coach than a boss. “He teaches you how to think. He teaches you the importance of purpose. Once you find that purpose, you almost get this magnificent obsession of going for something with everything you’ve got, and never letting a second go by, wasting it through evasion, through laziness, through avoiding what you know to be true. So it’s been liberating.”

  At first the BB&T philosophy doesn’t look all that different than the usual corporate pabulum. The stated vision is “To Create the Best Financial Institution Possible.”2 The mission is “To make the world a better place to live.”

  But then we get to the bank’s purpose, and that’s when things start to get interesting. It was “purpose” that first attracted Allison to Rand—what he finds living is all about.

  Our ultimate purpose is to create superior long-term economic rewards for our shareholders.

  This purpose is defined by the free market and is as it should be. Our shareholders provide the capital that is necessary to make our business possible. They take the risk if the business is unsuccessful. They have the right to receive economic rewards for the risk which they have undertaken.

  A Randian creed, indeed—it brings to mind some of the more flamboyant statements by Francisco d’Anconia, the noble and eloquent defender of capitalism in Atlas Shrugged. He said that “the most depraved type of human being” is the “man without a purpose.” And he said that “I want to be prepared to claim the greatest virtue of all—that I was a man who made money.”

  For critics of Rand, such statements supposedly argue for greed and selfishness. For her admirers like Allison, they are the enshrinement of the honorable matter of earning one’s living with one’s own productive work.

  For Allison, all companies exist to make money for their shareholders, though most pretend there’s some other more altruistic purpose. That’s a fundamental hypocrisy that undermines a business’s relationships with its employees. Allison says, “If you throw in a value system that has some kind of altruism, which most businesses do, then people know you’re not serious, because . . . you’re not treated that way, and you can’t be treated that way.”

  A typical altruistic purpose is to claim, necessarily falsely, that the business is all about serving clients—as though shareholder profits were to be sacrificed to make customers happy. BB&T turns this on its head in the statement of purpose, saying that client satisfaction is an essential means to the end of shareholder wealth creation.

  . . . our purpose, to create superior long-term economic rewards for our shareholders, can only be accomplished by providing excellent service to our clients, as our Clients are our source of revenues.

  If this sounds familiar to Rand fans, it should. Howard Roark, the rebellious architect hero of The Fountainhead, said, “I don’t intend to build in order to have clients. I intend to have clients in order to build.”

  But does this focus on clients and shareholders mean that employees of BB&T are to altruistically sacrifice themselves? Hardly. The next point in the statement of purpose states:

  To have excellent client
relations, we must have outstanding Employees to serve our clients. To attract and retain outstanding employees, we must reward them financially and create an environment where they can learn and grow.

  Shareholders, clients, and employees, all working to mutual benefit. Nobody sacrifices; everybody gains. Does this sound familiar, too? The great industrialist Henry Rearden explained it in Atlas Shrugged: “I do not sacrifice my interests to them nor do they sacrifice their interests to me; we deal as equals by mutual consent to mutual advantage—and I am proud of every penny I have earned in this manner.” Allison calls it the “trader principle.”

  He explains, “We talk about the trader principle over and over again. . . . You never should ever take advantage of other people, nor should you self-sacrifice. What life is about is creating win-win relationships, figuring out how to get better together, and you ought to do that consciously. What’s in it for you is a fair question, but what’s in it for them? . . . And you do that internally and externally. You treat your clients the same way. You never take advantage of clients, but if somebody’s trying to take advantage of you, I’ve told our employees many times, they are people you don’t want to do business with.”

  Finally, the statement of purpose brings it all together in one big integration of the trader principle:

  Our economic results are significantly impacted by the success of our Communities. The community’s “quality of life” impacts its ability to attract industry for growth.

  Therefore, we manage our business in a long-term context, as an integrated whole, with the ultimate objective of rewarding the Shareholders for their investment, while realizing that the cause of this result is quality client service. Excellent service will be delivered by motivated employees working as an integrated team. These results will be impacted by our capacity to contribute to the growth and well-being of the communities we serve.

  For BB&T, imbuing employees with a coherent purpose isn’t just a human resources exercise. It’s a high-powered competitive weapon.

  That’s because BB&T is organized as a network of 33 community banks, designed to operate in a highly decentralized way, aimed at meeting the unique needs of every individual market they serve. So typical centralized, one-size-fits-all command-and-control management techniques won’t work. Every employee has to be a self-guided missile, which means every employee has to be superlatively trained.

  It’s not cheap to superlatively train 30,000 employees. To afford it, BB&T spends less on advertising than its competitors do. BB&T sees a well-trained and empowered workforce as the best advertising in a business inevitably based on service, trust, and word of mouth.

  That’s why there’s BB&T University, where every year thousands of management-level employees are not only trained in the technical skills required to do their jobs, and not only trained to be more effective leaders, but also put through rigorous psychological workshops designed to eliminate unconscious barriers to excellence. For example, Allison believes that for many natural leaders, intelligence can get in their way. For some, it becomes a weapon that unintentionally drives colleagues away. For others, it becomes a wall that prevents them from hearing the feedback they need. Allison says, “If you really want to change people’s behavior, you’ve got to take them through a process where they can honestly look at their negatives.”

  For every single employee, from tellers to executive vice presidents, every single day, the Ayn Rand–inspired BB&T philosophy is the cultural glue the holds the far-flung organization together—and has kept it from getting into trouble while other banks have spectacularly blown themselves apart.

  Every employee is encouraged to read Atlas Shrugged. Every employee is given a printed copy of the BB&T philosophy embodying Allison’s Randian value system. Every year Allison, and now CEO Kelly King (a longtime Allison intimate), gives a one-hour presentation before all employees renewing the bank’s commitment to the philosophy.

  Where the rubber really meets the road is through semiannual performance appraisals, in which every employee from top to bottom is evaluated in terms of whether he or she successfully lived the BB&T philosophy.

  The bank’s purpose—to create value for shareholders—is only the jewel in the crown of the philosophy. Supporting it are 10 values that every employee is expected to bring to life every day on the job.

  Value #1: Reality

  Huh?

  Isn’t every business based on reality? In fact, isn’t everything based on reality?

  Actually, no. Lehman Brothers, Bear Stearns, AIG (American International Group), IndyMac, Washington Mutual, Countrywide, and all the other banks that blew themselves to smithereens in 2008 weren’t basing their businesses on reality. They were basing their businesses on sheer fantasy, wish, and whim—and an unhealthy dose of greed, the most unrealistic thing of all. They believed the housing market would always go up. Credit markets would never be illiquid. People with no jobs could pay back their mortgages.

  As the mortgage credit bubble was inflating in the mid-2000s, Allison could see that it was all underpinned by a single key denial of reality. According to Allison, at the peak, by any normal metric of affordability, housing prices were 30 percent above any historical experience. Housing prices were simply too high, and at a certain point they just couldn’t go any higher—so they had no place to go but down.3

  That was reality. And it was denied at almost every bank but BB&T. Every subprime mortgage, every exotic mortgage, every mortgage derivative—they were all based on the same denial.

  It seems obvious in retrospect, but while it was happening the denial of it was a subtle and complicated thing. In Allison’s view, politicians have for years overpromoted housing in the United States, distorting economic incentives with subsidies and tax breaks to favor home building and home ownership over other forms of investment. And in the early 2000s, these distortions were amplified by the Federal Reserve’s keeping interest rates artificially low.4

  Allison tells the story5 of a meeting with Barney Frank, the powerful chairman of the House Financial Services Committee and leading defender of the overleveraged government-sponsored housing lenders Fannie Mae and Freddie Mac, which did so much to put Americans into homes they couldn’t really afford (we’ll meet Frank again in Chapter 6, “The Central Planner”). For Allison, Fannie and Freddie were “a disaster you could see happening.”

  He told Frank, “I know housing’s a good thing, but . . . getting them into a home they can’t afford isn’t necessarily a good thing. If that were so, then next time somebody commits a crime, instead of putting them in jail, why don’t we give them a house?” How did Frank react to Allison’s sarcasm? Allison recalls the moment, rocking with laughter: “He looked at me like it was a serious proposal.”

  For the private 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 s
martest 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.