John A. Allison, who retired two weeks ago from a nearly 20-year term as chief executive of BB&T Corp., is renowned for his candor. In an interview last week at BB&T's corporate headquarters, he was true to form.

Mr. Allison, who remains the $136 billion-asset company's chairman through yearend, gave his perspective on the causes of the credit crisis, a scorecard of sorts for regulatory action, and a broad view of what the industry must do this year to expedite recovery.

Below are excerpts from the conversation:

What have been the less-than-desirable changes for the industry during your career?
It is interesting that, while we've been deregulated in certain ways, we have also been re-regulated in lots of other ways, and a lot of the new regulations, I think, are counterproductive in terms of efficiency and long-term financial health of the industry. On one front we've made progress — and lost ground on other fronts when it comes to regulations.

What were the root causes of the mess we're in now?
There are certainly individual financial institutions that have made some pretty serious errors. But the root causes, however, are government policy, and I think there are four primary culprits in that regard.

One is the Federal Reserve, which has, in my opinion, mismanaged the interest rates and monetary policy by driving rates down too low and raising them too high and that has distorted economic calculation.

The second is the existence of FDIC insurance, which has allowed people to raise money they couldn't have in a true free market. People like IndyMac are a classic example.

The third factor is housing in a broad context where the government tried to encourage [an] above-market rate of homeownership under the theory that homeownership is always good. Homeownership in general is good, but giving somebody a home is not necessarily good, and particularly if they're not able to pay for it.

If you wanted to have the real villains of the current crisis, Fannie Mae and Freddie Mac get No. 1 on the list because of their magnitude. When they went under, their liabilities were $5 trillion, and they were leveraged a thousand to one. They were big, and they were the Kahuna, and they were the ones who created the subprime crisis.

Finally, the Securities and Exchange Commission. Fair-value accounting has certainly accelerated the problems. If we had had it in the early 1990s, we would have had an economic collapse. It is a very poor accounting concept. Personally, I would just get rid of it tomorrow.

What can the industry do to fix itself?
I think the industry can tighten its credit standards. Obviously, lots of banks got too liberal. Banks can take [a] long-term perspective instead of trying to just maximize short-term profitability.

It is a good thing if the inefficient competitors go out of business. It was a good thing when IndyMac went under because it made the world a better place to live.

How does the industry look like in terms of survivors?
One of my concerns is that, through a very non-market-driven process, you have potentially created an oligopoly in the banking business, with four to nine institutions depending on how you look at it. I define that by the actions of the Fed.

Look at Citigroup. It failed twice last year and even more times during my career. That's not good, and it creates a challenge. While there are some economies of scale, you can say it's not obvious that having more than a trillion dollars in assets is a good thing. BB&T can compete very effectively against these big banks, but they have a … fundamental, long-term, potential competitive funding advantage if they are basically perceived as being subsidized or protected by the government. It's artificial, and you can argue that it is adverse selection. Citigroup shouldn't be here. You can say it was put together in a random fashion that wasn't market-based.

Is the Treasury's Capital Participation Program counterintuitive to finding a fix? Does it drag out the healing process?
We have plenty of money to lend. The problem is, the people you want to lend to don't want to borrow because of the economic environment. Those who want to borrow can't pay you back, and I don't think the purpose [of the Treasury's program] is to make loans to those people. There is capacity, but there aren't good borrowers out there.

Are there any redeeming qualities to the Tarp?
Only in one context. Tarp wasn't necessary except that the government created a panic and they probably had to do something about it. But they didn't need to create the panic to begin with.

What were the reputational implications of selling stakes to the government?
It created terrible long-term media issues for the industry. In our case we would certainly have preferred not to be in Tarp. We were experiencing a fairly major flight to quality, and Tarp really reduced that.

How would you characterize BB&T's participation then?
We were very strongly encouraged to participate. Very strongly. And once Tarp started helping our competitors we almost had to participate.

How realistic is it that BB&T can buy out the government in the near term?
I think it is going to be difficult until the capital markets settle down. You will have to pay a higher price in the capital markets for capital that you can argue we don't need. In order to make it earnings-neutral, it has to be leveraged. It is a difficult to find appropriate opportunities that don't carry a huge amount of risk down the road, and that's made worse with the problems with low Treasury bond rates.

What do you think about government backstops?
That's the best way to liquidate these companies. The logical thing is for the government to participate in helping find buyers for weak companies.

What will give you hope that we've hit the bottom?
I think the biggest indicator will be the stabilization of real estate prices. It is amazing to me how little focus has been put on fixing these real estate markets. Until you bottom real estate, you're not going to fix the economy.

Why haven't they done that?
I think probably it's politics. To really do something about real estate markets, you would need some kind of meaningful tax credit. It would benefit everybody, but it would also benefit high-income people. The irony is that you can't fix what is going on in the economy without benefiting the high-income people because they're the ones with the capital and can make the investments.

How much longer until things get better? What are the keys to getting through it?
I think the market will bottom in less than 18 months, but it will take at least 18 months before we see a meaningful recovery. I think BB&T will be very advantaged on the other side. We have an operating model and a culture that can compete more effectively over the long term.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.