Listen to audio clips of John Allison's views on the bailout, Citigroup and Bank of America and Fannie Mae and Freddie Mac.

Updated from 10:08 a.m. EST

For a free-market enthusiast like

BB&T Corp.

(BBT) - Get Report

Chairman John Allison, these are trying times.

In a career spanning four decades, including the last 19 as CEO, Allison helped build the Winston-Salem, N.C., bank into one of the 25 largest U.S. financial institutions -- and one that has weathered the credit crisis better than most.

Allison followed through with a long-planned decision to step down as CEO of BB&T at the end of last year, even amid the banking sector carnage that accelerated with the bankruptcy of

Lehman Brothers

in September. In an exclusive interview with

, Allison was critical of his fellow financial executives and the federal government as he offered his perspective of the causes of the crisis and solutions needed to restore the banking industry.


A lot of financial institutions did dumb stuff," says Allison. "

But they did it in the context of a government system that was misleading. I mean, probably all of us were misled."

"Once you had this government -- through the

Federal Reserve

, through the

Federal Deposit Insurance Corp., through

Freddie Mac

( FRE) and

Fannie Mae

( FNM) -- supporting this expansion of housing, it's easy to believe that housing prices won't ever fall," he says. "That was the context in

which very poor decisions were made."

An Admirer of Ayn Rand

Allison's philosophy is greatly influenced by Ayn Rand, who laid the foundation for generations of believers in free markets in her novel

Atlas Shrugged

. Rand was a big proponent of individualism and limited government intervention. The erudite Allison's admiration for Rand has won him both praise and criticism.

He established a charitable foundation through BB&T in which to donate to local colleges and universities, but stipulated that those schools incorporate Rand's philosophies as part of the curriculum. The move has generated a debate on whether donators should have the right to influence school curriculums.

As the financial crisis takes its toll on both healthy and troubled institutions, Allison is highly critical of what he suggests is an overregulated banking industry. He says mistakes made by the Clinton and Bush administrations led to an inevitable crash in the sector. More recently, the Treasury's bailout efforts though the Troubled Assets Relief Program, or TARP, has been misguided in its approach to the problem, he says.

"This is potentially the worst economic correction that I experienced in my career," he says. "What's unique in this correction was the panic created unfortunately by the Treasury, the Fed and

former President Bush in October."

AUDIO: Allison gives the bailout an 'F-minus.'

Allison takes issue with the government's ability to produce -- "out of the blue" -- $700 billion for the bailout package; the "incredible arbitrariness" of saving some banks and letting others fail; and the lack of consistency within the plan so far, he says.

"Markets hate that kind of stuff," Allison says.

'A Bailout of Poorly Run Financial Institutions'

As the Treasury was putting together the components to the original bailout package in September, after the failure of Lehman, the sale of

Merrill Lynch


Bank of America

(BAC) - Get Report

, and the failure of

Washington Mutual

, sold to

JPMorgan Chase

(JPM) - Get Report

, Allison wrote a letter to several members of Congress discussing his opposition to the original plan.

"While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions," Allison pointed out in the Sept. 23 letter. "It is extremely important that the bailout not damage well-run companies."

AUDIO: Allison says the government has created an 'oligopoly' by anointing banks.

Few would disagree that BB&T, which operates in 11 states in the South, mid-Atlantic and Washington, D.C., is a well-run company. The bank saw its total assets jump from $4.5 billion to $152 billion under Allison's stewardship. Its share price skyrocketed to its all-time high of $44.63 on Dec. 27, 2006. The stock is currently now trading at roughly $18 a share.


Allison established and nurtured a corporate culture of the highest integrity," BB&T lead corporate director James Maynard, who is also the co-founder and chairman of the Golden Corral restaurant chain, said in the August release announcing Allison's retirement. "His leadership is unique and unprecedented in the financial industry. Our company has seen profitable growth for more than 20 years."

Unlike larger, in-state rivals like BofA and


, which was acquired by

Wells Fargo

(WFC) - Get Report

at the end of last year, BB&T has remained


, mostly due to its conservative lending standards and the discipline that Allison and his team followed.

Richard Bove, an analyst at Ladenburg Thalmann, is among the bank's fans.

"While BB&T is fully aware of the challenges being presented by the current economic downturn, the bank seems to have a positive take on its position within the economy," he wrote in a recent note.

Some observers are concerned about BB&T's large commercial loan exposure, as signs of cracks in the commercial market are beginning to show. The company set aside an additional $528 million in the fourth quarter for loan losses, compared to $184 million a year earlier.

"In 2009, the next big problem for banks, including BB&T, is commercial loans and how that plays out," says Tom Hepner, an investment advisor at Ruggie Wealth Management, which does not own BB&T shares. "With concentration in these they are probably going to show some exposures to loans that were approved in a very dynamic growing period."

Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners, also maintains a sell rating on BB&T, due to the general residential housing malaise, despite his fondness for the company and Allison.

A Reluctant TARP Recipient

Allison has been vehemently opposed to the Treasury's Capital Purchase Program, in which the government has bought preferred equity stakes in banks, but the company ultimately participated under pressure from regulators. BB&T also believed that the public perception of rejecting the government's aid would be that something was wrong with the company, he says.

BB&T received $3.1 billion in TARP fund in the fourth quarter. The company says it will use the capital to expand its lending business, but the challenge is making "good loans," Allison says. Congress has been critical of the banks for "hoarding" the money or using it to acquire troubled institutions.

"This is a tough environment to make good loans because the people you would like to lend money to unfortunately don't want to borrow it because they're scared," he says. Still, BB&T is "picking up a lot of business -- a lot of clients that had long-term relationships with ... competitors," he continues. "So in that sense it's actually been good for us."

Allison cautions that there is a flip side to the opportunity created by competitors' troubles.

"Even among our client base we're getting a lot more questions about us because they've heard about BofA and Wachovia," he adds. "So even though we're picking up business,

which in some ways is healthy, if you gave me a preference, I wish they were in better shape."

Housing Must Be Addressed

Allison says the government's priority right now should be to stabilize home prices, because once the housing market bottoms, "the economy will follow it soon."

He suggests that the government offer homebuyers a 10% tax credit to encourage consumers to purchase homes that are already built or in the process of being built in order to clear the excessive inventory. The tax credit would "create a floor on the housing market," he says.

"That's very important ... to the capital markets," he says. "... So even if it meant house prices were going to go down another 10%, but you knew that's where they were going to stop, then you could re-price the capital markets and value all this stuff."

Allison says the roots of this downturn were laid out by years of easy credit and misguided policies from the Fed and Republican and Democratic administrations.

For one, the aggressively low interest-rate management by former Fed Alan Greenspan created the "illusion of low risk" in the economy that caused consumers and investors to "save less" and "make more risky investments," he says. From the early 1990s through 2007, "we didn't have a meaningful correction," he says.

"Every time there was a bump, the Fed did everything they could to smooth that bump out," he says. "

What they did was defer the problems and create a much bigger problem."

Allison says the creation of the Federal Deposit Insurance Corp. in the 1930s provided a "lack of discipline" at financial institutions seeking to grow their deposit bases.

Most importantly, he took issue with the Clinton administration's affordable housing policy objectives, which ultimately led to the solidification of government-sponsored enterprises Fannie Mae and Freddie Mac as major players in the mortgage market.

"Homeownership is a good thing in a broad context, but encouraging people to buy homes they can't afford is not a good thing," he says. "If you want to look at the proximate cause for this mess you got to focus on Fannie Mae and Freddie Mac. They would have never existed in the free market. They drove the mortgage market."

AUDIO: Allison says Fannie and Freddie were 'mathematical disasters.'

Allison remains BB&T's chairman through this year, but has turned the CEO reins over to former COO Kelly King. Once fully-retired, Allison plans to write several books on topics including the latest financial crisis and leadership. He hopes to enter academia by becoming an "executive-in-residence" at a local college.

"I'm going to be out there trying to defend economic freedom at universities," he says.

Fitzsimmons, the Sandler O'Neill analyst, says Allison would likely be at home as a professor.

"I've always looked forward to any events where he speaks," he says. "Some CEOs get up there and just go through the slide deck and tell investors what they want to hear. He gets up there and actually says what he thinks and what he believes."

Allison recommends to the next generation of executives to remain focused on the "fundamentals" of banking, which includes superior customer service, treating your employees well and not offering exotic products.

"There are no free lunches," Allison says. "You look at what people tried to do, they did things that were bad for their clients that came back to haunt them."