Caught in the money PIT; the federal government struggles to yank banks out of the hole it dug and then let them fall into.

• Position: FINANCE

As autumn's chill fell, financial institutions that seemed strong and nimble creaked and buckled. The U.S. Department of the Treasury and the Federal Reserve System tried to ease the pain with hundreds of billions of bailout dollars, but action came too late for Charlotte-based Wachovia Corp. The nation's fourth-largest bank holding company, choked by subprime mortgages and struggling to borrow what it needed, was married off shotgun-style by regulators to San Francisco-based Wells Fargo & Co. in December. Other Tar Heel banks suffered, too, and the agony will continue for some, says John Allison. He retired in December after 19 years as CEO of Winston-Salem-based BB&T Corp. but remains chairman of what is now the second-largest bank based in North Carolina.

BNC: What surprised you about the financial crisis?

Allison: The magnitude and the diversity of the problems--and how poorly it was handled by the Treasury and the Fed. They handled it on a case-by-case basis with no systematic approach, and that magnified the problems.

Did any other state's financial industry suffer as much?

Ohio's, probably. But because the financial industry is such a big player here and Wachovia has been such a large force in the economy, the impact has been significant. Real-estate markets have been much more severely impacted in Florida than in the Carolinas. And to some degree, the problems in the real-estate markets are reflected in the capital markets and the financial industry. So from an overall economic perspective, North Carolina has not been one of the hardest-hit states.

You've blamed most of the mortgage mess on Freddie Mac and Fannie Mae, both chartered by Congress, yet other companies made most of the subprime loans.

Government policy created this situation more than any action of any individual financial institution. First, the Federal Reserve mismanaged the interest rates. It drove rates too low, which caused people to make investments they wouldn't otherwise have made. Then it raised rates very rapidly and put huge stress on bank margins. Second, the very existence of the FDIC encourages what I call a moral hazard. If you look at the companies that have had problems--Washington Mutual, Countrywide or Golden West--they all raised deposits using the FDIC insurance, paying above-market interest rates to get those CDs to fund high-risk assets. Without FDIC insurance, that could have never taken place because people would have looked at the quality of...