What if there were no “too big to fail”? Fed’s Hoenig has a vision

April 26, 2010

USA/Democrats and Republicans alike on Capitol Hill say they want to toss out the concept of “too big to fail” in the financial regulation reform they are tussling over. That way if a financial firm is going to go under, it will go under, with no thought for a taxpayer handout.

Since the concept of “too big to fail” has yet to be erased by law, and its demise yet to be tested by a failing financial institution, it was interesting to hear how Kansas City Federal Reserve Bank President Thomas Hoenig envisioned the financial industry without that concept to lean on.

Looking back in time — “If you had a clear resolution process, and you had clear rules on leverage,” a domino-like string of large bank failures may have been less likely.

“And if the other institutions were sound but only had liquidity problems, the discount window could have been and would have been used in those instances,” he said at a Reuters Global Financial Regulation Summit.

“So, I don’t know the counter-factuals, but I know there’s a reasonable case to say if the market knows the rules are firm, that the resolution process is under the rule of law, that you will be held accountable, and here are the steps we’re going to take, would you have had the same outcome?”

“If you cannot say that we can address this, then you need to break them up,” he said.

Hoenig sees financial regulation reform as a measure of prevention that will mitigate another banking crisis. “But no one can guarantee anything. But I do know that if we don’t address it, then I know exactly what the outcome is.”

What are the risks if financial reform is not done the right way?

Hoenig saw continued consolidation, a less competitive environment, and “the outcome will be long-run negative for this country.”

Photo credit: Reuters/Jim Young (Kansas City Federal Reserve Bank President Thomas Hoenig at Reuters Summit)


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NOW “you need to break them up,”

Posted by alwil | Report as abusive

Those who are “too big to be FRAUDULDENT” without threatening ordinary people’s small loans, or pension, need bigger penalties, and penalties that can teach a lesson, and reach the deep pockets of the crooks- e.g., those who cooked Lehman’s books and siphoned out investors funds and then found protection of their loot hidden in private pockets under bankruptcy and corporate limited liabilities: NO MORE.

Posted by Jos5319 | Report as abusive

They are “too big to be FRAUDULENT”, not too big to fail.

We want the big crooks to fall, but not the investors’ money innocently invested in their companies.

Breaking them up alone won’t do.
They’ll just structure themselves like brother and sister companies and continue their fraud behind the scene, off the official books,i.e., they’ll find legal loopholes to continue their fraud if the “regulation” is so tangential, and failed to target fraud.

The real deterrent comes when those, such as the ex-Lehman Brothers executives and accountants, who cooked the books, hid the loss from investors, siphoned out investors’ remaining assets to fatten their own pockets, then protected their personal loot under bankruptcy laws with the help and acquiesce of then, head of Treasury H Paulson– all those involved must get stiff penalty for the fraudulent culture. That’s the only way to start REAL CHANGE. H. Paulson should not be too big to fall— him falling would send a message that their deceitful behavior will not be tolerated.

No CORPORATE VEIL, No BANKUPTCY PROTECTION FOR FRAUDULENTLY OBTAINED MONEY, No ADMINISTRATIVE IMMUNITY for GOVERNMENT OFFICIALS WHOSE DECEPTION WAS AS EGREGIOUS AS H PAULSON’S. Only then, will the BIG CROOKS FALL, and we want them to fall, BUT COUGH UP THEIR LOOT– then the economy, more precisely, the confidence of investors and consumers in the entire world will recover.

Posted by Jos5319 | Report as abusive