“We allowed these commercial banks with special federal protections over a decade to increase their risk profile greatly. And thus we increased the fragility of the system.”
“You’re subsidized GSEs; You’re public utilities for goodness sakes.”
-Thomas Hoenig, Kansas City Federal Reserve President
At yesterday’s National Association of Attorneys General meeting, the speaker who followed me was Kansas City Federal Reserve President Thomas Hoenig. He made one of the most cogent, persuasive arguments against “Too Big to Fail” I’ve heard from any public official outside of Volcker.
Highlights of Hoenig’s commments:
• Big banks must be limited in scope
• Hedge funds and investment banks should take risks with their own capital, not money borrowed from — or guaranteed by — the taxpayers.
• The Glass Steagall Act was an effective deterrent to TBTF from when it was enacted in 1932 to 1999 when Glass-Stegall was repealed.
• Commercial banks receive special funding privileges from the Federal Reserve; therefore, they should be limited to just taking deposits, making loans and processing payments.
• Off limits in Hoenig’s view: Exotic and complex investments, derivatives, and leverage.
• When a bank fails, then management and the board gets fired, stockholders are wiped out, government acts as Debtor in Possession and facilitates a sale of the assets (proceeds to creditors and bondholders)
Fascinating stuff, and a thrill to see a high placed Fed official who so totally is willing to stand up to take on the risk of the giant banks in a productive and intelligent way.
Related: Volcker Rule Activity Restrictions
(Hoenig’s comments on the Volcker Rule).