Blog » Hoenig: Let Big U.S. Banks Fail

Posted on: August 20, 2009 at 11:38 am

Kansas City Fed President Thomas Hoenig, the host for the annual Jackson Hole Fed confab, is utterly against bailouts, and thinks “Too Big To Fail” is a losing strategy.

As I noted previously, “Real capitalists nationalize; faux capitalists look for the free lunch.”

Bernanke has urged Congress to back part of Hoenig’s proposal for dealing with faltering big banks, which would wipe out shareholder equity in any that receive government aid. The Treasury Department’s so-called resolution authority plan, while likely to result in stockholder losses, doesn’t require it . . .

Hoenig, 62, took office in 1991 and is soon to be the longest-serving Fed policy maker. Out of the 12 regional Fed presidents, he is one of two to have served as a head of bank supervision. Hoenig is tougher than his colleagues on inflation, having dissented from interest-rate votes four times since 1995, always for tighter policy.

Alternative to Bailouts

Companies with weak capital or investor confidence shouldn’t be bailed out, Hoenig said in a private talk in Omaha, Nebraska, in March. He said the government instead should declare them insolvent, replace managers, remove the bad assets and require shareholders to take losses. Hoenig broke from his usual practice of speaking from notes on index cards for non- economic comments and released written text entitled “Too Big Has Failed.”

One of the great tragedies of the entire banking debacle — from the run up to the collapse and aftermath — is how miuch good advice was ignored. This is yet another unfortunate example . . .

See this July video, Hoenig Calls For Takeover Process For Failing Firms.

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Sources:
TOO BIG HAS FAILED
Thomas M. Hoenig President and Chief Executive Officer
Federal Reserve Bank of Kansas City, March 6, 2009

http://www.kc.frb.org/speechbio/hoenigpdf/omaha.03.06.09.pdf

Hoenig Stirs Debate on Bank Failures as Fed Forum Convenes
Scott Lanman
Bloomberg, August 20 2009

http://www.bloomberg.com/apps/news?pid=20601068&sid=aFsKPn0jLwSU

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Previously:
Why Are Banks So Different From Autos? (December 9th, 2008)

http://www.ritholtz.com/blog/2008/12/why-are-banks-so-different-from-autos/

Time to Get Swedish (January 23rd, 2009)

http://www.ritholtz.com/blog/2009/01/time-to-get-swedish/

Nationalize Now (January 26th, 2009)

http://www.ritholtz.com/blog/2009/01/nationalize-now/

Why Not Nationalization? (February 4th, 2009)

http://www.ritholtz.com/blog/2009/02/why-not-nationalization/

Favoring Nationalization Are . . . (February 20th, 2009)

http://www.ritholtz.com/blog/2009/02/favoring-nationalization-are/