Donald Luskin

by I Am John Galt

  We’ll see. Maybe Gates’s genius—and his money—really will solve some of the world’s problems. Allison is skeptical. “Because of comparative advantage, what he was special at was computers, not solving poverty in Africa, but maybe he’ll get lucky.”25

  In Defense of Capitalism

  After John Allison signed the document surrendering substantial control of BB&T to the whims of the federal government, after he put down the pen, after he rode down the elevator from the top floor of the tall black building in Winston-Salem and walked into the chilly November night—after he walked away from the world—where did he go, and what did he do?

  Rand’s hero John Galt, the man who walked away from the world, went to Galt’s Gulch, hidden in the mountains of Colorado, and recruited other great minds to join him on strike against the looters, the power seekers, and the altruists. Allison hasn’t exactly done that, but in his own affable Southern way, he’s done something almost as subversive.

  Instead of Galt’s mountain fastness, Allison can be found on Wake Forest University’s leafy campus, in a small office crammed with books by and about Ayn Rand, teaching courses in leadership and directing a growing campaign to teach the morality of capitalism in America’s colleges. Like Galt, he’s spreading the word.

  It started when he was still at BB&T. He recalls, “For years, banks have been big contributors to community projects. It’s kind of expected in the business, and it’s probably a legitimate part of the business, because a lot of our clients are involved in stuff and those kinds of things. . . . Our focus . . . has always been on education. So we were a pretty big contributor to universities.”

  Which makes BB&T no different than any other bank. But John Allison is very different from other bank CEOs—he’s a Randian. So when he asked himself, “What is the issue that maybe we could have a big impact on?” there was just one possible answer: “Capitalism.”

  Allison wasn’t interested in helping universities teach economics. He was interested in helping universities teach the morality of capitalism—the philosophy underlying it, and the reasons why it is the only way of arranging economic affairs that is consistent with human freedom.

  “There’s really no economic argument against capitalism,” Allison says. “We’re just losing the ethical fight. . . . And ethics always trumps economics.” In other words, no matter what heights of wealth and advancement capitalism leads the world to, it seems there’s always somebody complaining about the brutality of its innate competitiveness or the unfairness of the inequality it produces. So the system that abolished slavery from the face of the earth and makes it possible for 7 billion souls to live on it is nevertheless always under political attack.

  “So we’ve got to have an ethical fight,” decided Allison. “And of course, based on my beliefs, I said, well, we’ve got to get Rand into the fight.”

  But that wouldn’t be easy. Rand considered herself a serious philosopher, but she’s scarcely taught in university philosophy departments. Perhaps it’s because she chose to express her philosophy in accessible popular novels rather than in impenetrable textbooks. Or perhaps it’s because she has always been seen as a political conservative, something not exactly embraced by today’s liberal-dominated college faculties.

  “Rand has obviously been consciously not included,” Allison claims. “Academics, they don’t want her in. They’re scared of her, in my opinion. She’s threatening.”

  So Allison decided to build an entirely new academic initiative for the advancement of the morality of capitalism, with Ayn Rand at its heart—just as decades earlier he had set out to build a banking empire the same way. “We started working with a number of universities,” he recalls. “Our first program was at Duke and we did something at Carolina. They’d agree to require Atlas Shrugged, and we’d say, okay. If they want to teach it and say it’s stupid, that’s fine. I’ll let the students read it and make their own judgments.”

  Building an education revolution takes time, just like building a bank did. “We’re now up to 60 programs,” Allison says, beaming. “Almost all of the major universities in our footprint now, and lots of other colleges and universities. . . . And I get really positive feedback about this. I have talked to numerous students who have said, ‘Man, this course changed my whole worldview, and I am a better human being for it.’”

  John Allison also has a long list of Randian recommendations for repairing the American economy in the aftermath of the mortgage crisis that nearly destroyed it.

  He’d like to see the Federal Reserve stripped of its limitless powers to print money, and return to an objective standard of monetary value such as gold. He’d like to see the tax code transformed so that consumption, not investment, is taxed. He’d like to see Social Security, Medicare, and education privatized. He’d like to see immigration liberalized so that the best and the brightest can come to the United States. He’d like to see banks given more stringent capital requirements, and have them return to more traditional forms of mortgage lending.26

  Most important, he wants to change the culture. He wants the attacks on capitalism to stop, for capitalism to be embraced as the most effective and the most moral system of economic organization. And it’s to that most important objective that he’s devoting his attention now, through his sponsorship of university programs on the morality of capitalism.

  Can he win? Can capitalism win? Can Ayn Rand’s ideas win? At least for Allison, they’re winning the war on the home front. He says, “My son read a lot of Objectivist stuff, seemed to agree with it, went away to college, and became very down on Objectivism. Then he graduated from college and took a couple months after he graduated, reread all the stuff, and said, ‘Wow!’ He said, ‘You know, Rand’s right.’”

  So perhaps there’s hope. Maybe someday Allison will return from academia to the world and, like John Galt, raise his hand over the desolate earth and trace in space the sign of the dollar.

  Chapter 4

  The Parasite

  Angelo Mozilo as James Taggart, the businessman who corrupted government and nearly wrecked the U.S. economy

  The controlling stock of Taggart Transcontinental was left to James Taggart. . . . Dagny had expected the Board of Directors to elect him. . . . They talked about his gift of “making railroads popular,” his “good press,” his “Washington ability.” He seemed unusually skillful at obtaining favors from the Legislature.

  —Atlas Shrugged

  Who is James Taggart?

  James Taggart is one of the key antagonists in Atlas Shrugged, a corrupt businessman who, knowing that he lacks the skills required for legitimate success, uses political influence to build his business, the great railroad Taggart Transcontinental. Every corrupt move by Taggart sets in motion unintended consequences that actually damage the railroad and spill over into the rest of the economy.

  Taggart’s sister Dagny, a businesswoman whose sparkling competence is set in stark contrast to her brother’s impotence, is constantly scrambling to undo the damage he causes. Whenever Dagny’s efforts succeed, James takes credit for them.

  As Taggart’s web of corruption becomes increasingly unsustainable, he marries a naive shopgirl who is awed by his apparent business success. She eventually learns the truth about him, and as their marriage deteriorates, she seeks comfort from Dagny. In one of the book’s most poignant moments, the heartbroken girl tells Dagny, “But you see, I married Jim because I . . . I thought he was you.”

  James Taggart is Ayn Rand’s deepest exploration of the mental state underpinning evil. She argues that her own philosophy of self-interest is rooted in the objective survival requirements of man’s life on earth as a thinking being. The opposing philosophy of collectivism and altruism undermines man’s ability to live, and those who pursue it implicitly advocate the only egalitarian state possible—death. At the climax of Atlas Shrugged, Taggart consciously realizes for the first time that his life has been dedicated to the pursuit of death, and he is driven to madn
ess.

  As he sat down at the conference table for Countrywide Financial’s quarterly earnings call on July 24, 2007, beads of sweat formed under CEO Angelo Mozilo’s starched French collar. It wasn’t the 90-degree heat outside the window of Countrywide’s Calabasas, California, headquarters that wrung perspiration from his pores, but rather the agonizing prospect of what he was about to do.

  He was about to lie to his shareholders and to the world. He knew he was looking at imminent ruin, and he knew that the moment he admitted it, that very admission would make that ruin actually happen. So Mozilo sweated while he prepared himself to say whatever he had to say to keep his multibillion-dollar house of cards from collapsing for at least another couple of weeks.

  What he didn’t know then was that the collapse of Countrywide was about to trigger a global near-depression, as the subprime credit bubble Mozilo did so much to create—by manipulating for decades the power of government for private gain—was to suddenly burst.

  Mozilo is the man Ayn Rand warned us against exactly 50 years before that fateful 2007 earnings call: the corrupt businessman who forges an unholy alliance between capitalism and government. Rand’s literary template for Mozilo is James Taggart, the principle villain of Atlas Shrugged.

  Taggart, the heir to a railroad fortune, is ambitious—hungry for power, hungry for approbation. But he lacks the energy or ability to really run or grow the railroad. So he cultivates connections in government, and uses their power to obtain subsidies for his railroad and to destroy his competitors—all the while spouting high-minded rationales based on public service. By the end of Atlas Shrugged, Taggart’s corruption and all its unintended consequences have nearly destroyed the entire U.S. economy.

  Unlike Taggart, Mozilo didn’t look the part of the corporate titan. With his perma-tan face framed by platinum hair, loud pinstriped suit, flashy tie, and gleaming extra-white Guy Smiley grin, Mozilo looked more like a goodfella turned daytime game show host than the head of a publicly traded company. In truth, this son of a Bronx butcher presided over the nation’s largest mortgage lender, built from a two-man start-up at his partner’s kitchen table decades ago.

  Through the years he had positioned himself as the consummate front man of the company, the guy’s guy, able to move deftly in the right circles of influence well above his lowly origins. His feelings of inferiority drove him to fight past the old-money club and eventually beat those pretentious old-school mortgage bankers at their own game. “I run into these guys on Wall Street all the time who think they’re something special because they went to Ivy League schools,” he told the New York Times; “it bothered me when I was younger—their snobbery and their looking down on us.”1

  If you didn’t look closely, you could admire Mozilo’s rags-to-riches story. But the reality is that competing against the well-equipped armies of traditional bankers on the sunlit field of open competition was too daunting a prospect for this squire with dreams of becoming king. Instead of facing them head-on, he’d operate from the dim shadows cast by government-induced market distortions and conduct his business through favoritism and political pull supplemented with a healthy dose of outright deceit.

  Driven by a no-holds-barred marketing campaign and governmental lobbying effort, he’d turn a modest-margin business with a consumer mind share on par with a municipal utility into a popular fad with national brand-name recognition. Countrywide’s ticker symbol, CFC, would become known at one point as the “23,000% Stock”2 for a two-decade run of 30 percent average annual gains.

  Mozilo was a key architect of the U.S. housing bubble—or maybe more accurately, a key arsonist whose government-subsidized subprime mortgages were the accelerant to what turned out to be a housing and credit conflagration. All along the way he’d rationalize his actions in altruistic terms of social progress. “I gave a lot of people the opportunity to realize the American dream”3 was his typical refrain. “Our unifying mission is to close the gap in minority homeownership”4 was another of his do-gooder mantras. All the while, his real aim was to skim as much vigorish as possible from high-risk loans that had little if anything to do with supporting actual home ownership.

  The chief co-conspirator in Mozilo’s grand scheme was a government-sponsored enterprise (GSE) known as Fannie Mae (it, in turn, was motivated by a government co-conspirator, Barney Frank, whom we’ll meet in Chapter 6, “The Central Planner”). By buying Mozilo’s risky and sometimes fraudulent mortgages and thus freeing up Countrywide’s capital so it could solicit even more business, Fannie supplied the rocket fuel that helped Mozilo blast Countrywide from obscurity past Citigroup and Wells Fargo to the top of the mortgage heap. “If it wasn’t for them,” Mozilo said of Fannie, “Wells [Fargo] knows they’d have us.”5

  Why did Fannie play along? Simply because Fannie’s government bureaucrats funneled tens of millions of these subsidized dollars into their own pockets in the form of outlandish salaries and incentive bonuses.6 “These are the most successful corporate hermaphrodites in world history,” consumer advocate Ralph Nader said of Fannie Mae and the other GSEs. “[They] report massive profits, provide their top executives with huge compensation packages and laugh all the way to the bank with government guarantees. It’s a paradigm of how to influence Washington.”7

  Like James Taggart, Mozilo skillfully cultivated his buddies in Washington; that’s the one thing he was actually good at, if not downright brilliant. To make sure politicians and regulators didn’t raise an eyebrow at the deteriorating credit quality of Mozilo’s loans purchased by the agencies under their control, he’d buy off senators, congressmen, congressional staffers, lobbyists, local politicians, home builders, and law enforcement officials with sweetheart VIP mortgage deals under a program known as the Friends of Angelo. “Countrywide’s VIP loan program was a tool with which the company built its relationships with Members of Congress and Congressional staff,” read a Staff Report from the U.S. House of Representatives Committee on Oversight and Government Reform.8 “It was also a tool it used to protect its relationship with Fannie Mae.”

  Back in Calabasas, he handpicked his board of directors, just like Taggart did, building what amounted to a personally controlled audience of dutiful admirers. Business qualifications? Don’t ask—Countrywide’s board included a former basketball star with nary a dribble of banking experience on his stats sheet. It was just a puppet show to provide the appearance of corporate governance and oversight. “When we had to fill a spot, I just took on the responsibility of trying to find someone” is how Mozilo explained his board makeup. “It started from me and therefore it was difficult for the board to say ‘We don’t like him.’”9

  When bankers or the press pushed for GSE reform, Mozilo would rise to their defense as an “independent” industry leader operating for the social good of home ownership. “America has the world’s highest rate of homeownership because we’re the only country that has a Fannie or Freddie,” he’d cry out to the New York Times. “Nobody wins if they’re damaged or impeded. Housing is the only thing driving the economy right now.”10 When Jack Kemp, George H.W. Bush’s Department of Housing and Urban Renewal (HUD) secretary, tried to scale back some government assistance for the mortgage market in 1990, Mozilo publicly denounced him as “the worst person who could possibly have been put in that position.”11

  For Mozilo, subprime lending, which began as a competitive enterprise to tap an underserved market for home financing, had devolved into a mere financial scheme. He had become the street dealer of high-risk loans sponsored by a pseudo-government kingpin who packaged and resold them in disguise, complete with a heavy guarantee unwittingly lashed to the backs of the American taxpayer. The entire cabal of players, from the home builders to the Realtors to the industry lobbyists to Mozilo and Countrywide itself, took a cut. As long as the money kept flowing, all was good in the family.

  But Mozilo was sweating before that 2007 earnings conference call because the strings of personal favors done and influence pu
rchased through the years had spun into a tangled web that now threatened to strangle him. He must have felt like James Taggart did when his railroad was falling apart, and his sister Dagny—the sparklingly competent businesswoman who actually ran the railroad—warned him, “I have no idea what sort of games you’re tangled in, you and your Board of Directors. I don’t know how many ends you’re playing against the middle, or against one another, or how many pretenses you have to keep up in how many opposite directions.”

  But there was a key difference. In Atlas Shrugged, Dagny’s brilliance saved Taggart from himself, over and over. In 2007, no one could save Angelo Mozilo. During the prior year, Mozilo had become acutely aware that his reckless underwriting and market-share-at-any-cost strategy had generated a landfill of decomposing loans. “We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet,” he wrote behind the shroud of internal corporate e-mail in the middle of 2006.12 The assets, he said, were “toxic,” “poison,” and “the most dangerous product in existence.” As for the prospects of his company, he privately acknowledged, “The bottom line is that we are flying blind.”13

  Like a rat in a trap, for this man who had held tight to his founder’s shares since the very inception of his company decades before, the only priority was to get out. From November 2006 through August 2007, Mozilo exercised over 5.1 million stock options and sold the underlying shares for total proceeds of over $139 million.14 He had done a monumental job of secreting his gold out of the treasury, but as he sat there sweating in July 2007, ready to face his stakeholders, he wasn’t quite free and clear yet.