Archive for the ‘Fed’ Category

Rot at the Core: KC Fed Pres. Hoenig says "Too Big has Failed", and calls for receivership of failed banks / end to bailouts

March 9th, 2009 No comments

Finally, someone in the Fed is arguing that the Fed should stop printing money like crazy to bail out managers, owners and counterparties of failed banks.

In a speech on Friday, March 6, Thomas Hoenig, President of the Kansas City Fed, argued strongly that “Too Big has Failed“, and that the continuing ad hoc bailouts are just stringing out the ultimately necessary realization and workouts of failed banks and bad assets, thus creating uncertainty while increasing the cost of the crisis by prolonging the unavailability of credit.  Hoenig argues that a transparent receivership program should be set up for large, insolvent institutions, whose management should be fired and shareholders wiped out.  The whole speech is worth a read.

It is bracing to see someone in the Fed finally start talking about action to end the bailouts, but an honest observer would have to realize that federal and state regulators already have all the authority the need to take over insolvent banks; they just need to have the Fed and Geithner stop handing out money to those who have already lost hundreds of billions.  In rougher terms, no more “stinking badges” are needed; just action.  It is unlikely that simply the creation of a new RTC for too-big-to-fail banks will, as Hoenig suggests, by itself “restore an important element of market discipline …, limit moral hazard concerns and restore  and restore … fairness of treatment”.   Federal and state banking regulators already have sufficient authority; what they`re lacking is the political will to stand up to the managers and owners of failed institutions and pull the trigger.  Hoenig is essentially punting to our lazy and corrupt Congresscritters, who will no doubt give owners and managers a chance to influence any new receivership law.

Hoenig does indicate that lawmakers/regulators should consider how to prevent firms in the future form backing “to big to fail”; my suggestion?  Follow the suggestion of Glassman and Nolan that banks be encouraged to adopt a partnerhip or corporate structure that does not include a limited liability feature for owners, who, because they would have unlimited personal liability for losses, would  be incentivized to very closely monitor risks.

h/t to Calculated RISK  

Categories: banks, Fed, limited liaiblity, moral hazard Tags: