​Before becoming involved in a merger, it is critical that your own organization be running well. You are extremely unlikely to fix a broken system with an acquisition.

​It was also decided that our focus would be on solid or medium performing institutions. Dysfunctional organizations are typically difficult to fix. Also, it is hard to improve the performance of high performers. Why would a high performer sell if there were not hidden issues?

Some of our competitors in the acquisition business would justify paying higher prices by assuming very aggressive cost savings...Our experience indicated that an acquirer who paid too much for one company would pay too much for the next company and would be forced to cut costs too aggressively, which destroyed the business it had acquired. 

On the date a merger was announced, we would hold an all-employee meeting in smaller companies and an all-manager meeting in larger businesses...At this meeting, the leaders of our merger partner would outline the reasons they had chosen to sell to BB&T. I would then discuss BB&T's strategy and culture with a primary focus on what it looked like to work for BB&T. We were very transparent to the employees about the benefits and the negatives of the merger from their perspective. Our goal was to eliminate as much ambiguity as possible. Ambiguity is more difficult to handle than bad news

Also, as we continued to roll up agencies, the insurance companies whose products we sold took notice because they realized the traditional agency system was not efficient and that we had developed a better model. We began to be able to negotiate better deals with the insurance companies, which allowed us to be more competitive in driving revenue (and sales incentive for employees) for the acquired agencies.

Over time, BB&T has radically improved its cross-sell effectiveness, but there is a long learning curve for both bankers and agents. The key decision early on was to focus on having a world-class insurance agency system and then to drive cross-selling. If we truly were able to deliver better insurance products and services to our banking clients, then the cross-sell would naturally follow.

BB&T purchased a subprime automobile finance company at exactly the wrong time in the credit cycle. Prime-grade auto finance is one of BB&T's core businesses, and we thought there would be synergies between the prime and subprime businesses. The owner of the subprime business was very smart, and he saw the correction coming and sold at the peak. Be careful in buying a business from someone who knows a lot more about the industry than you do. ​

A little background, NCNB/NationsBank/Bank of America (same organization with new names) and First Union/Wachovia (the same organization with different names) had both coveted BB&T. The only way I was able to keep either organization from making an unfriendly offer was to play them against each other. I told Hugh that he could make an offer that would probably force us to sell, but I thought I could direct the sale to First Union. I told Ed Crutchfield, who was CEO of First Union, that if he forced the issue, I thought I could direct the sale to Bank of America. Of course, in order to earn the right from a shareholders' perspective to remain independent, we had to outperform the potential acquirers, which we did.

Bad things happen when people misprice risk. 

From the credit crisis of 2008, to the tech bubble of 2000, to the panic of 1873, all are the product of human misjudgement regarding risk.

Below, I present evidence of a current mispricing in one corner of the credit market. This same phenomena preceded nearly every equity market correction over the past thirty years.

I used to work in Municipal Bonds, both buyside (mutual fund shop) and sell-side (bank trading desk). I now follow muni bonds as an allocator at a family office.

High yield munis have a greater yield than investment grade munis. 

How much more yield? Glad you asked...

High yield muni bond funds have been around for a long time. MFS Municipal High Income (MMHYX) has been around since 1984. We can compare the yield on this fund to an investment grade fund, Vanguard Long-Term Tax-Exempt (VWLTX), to get a sense for "How Much More Yield".

Over the past 30 years, high yield munis have yielded 124% of investment grade muni bonds, on average. This ratio is illustrated below. The lower the line, the less investors are being paid to take on high yield credit risk. 

What is the current yield ratio?
​
115% and dropping, compared to a long term average of 124%.

Relative to investment grade munis, high yield is very, very expensive. Mispriced risk, illustrated.

Perhaps something has changed over the past few years to make high yield muni credit fundamentally less risky than it has been in the past, but I doubt it. In fact, with the reduced role of municipal bond insurers since the credit crisis, muni bonds are likely more risky.
​
You may be thinking... so what if high yield munis are overvalued, just don't buy them. 

Yes, but notice what happens to the equity markets when the yield ratio gets to 115% or lower.

​1987:

1990:

1998:

2007:

2016?