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/

Category: Bailouts, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “Hoenig: Let Big U.S. Banks Fail”

  1. mcHAPPY says:

    The problem with common sense is that it is not too common.

  2. farmera1 says:

    I’ve heard Hoenig talk. Very impressive. Seems like a “real” person (and yes a midwestern person at that).

    Not much BS, direct and very logical. Seems like a person I would trust with my money vs most big investment bank CEOs who usually remind me of used car salesmen/marketing types that look the part more than offering anything of substance. The type that like to fly around in the corporate jet (maybe for personal shopping trips to Hong Kong)with white leather and crystal all the while scheming on how to get their deserved $100 million pay days. The corporate royalty types. The type that their second main object in life after personal enrichment was to capture regulators under the meme of “deregulation”. Had to change those rules (as Ken Lay of Enron fame said, the only rules are that there are no rules) to allow for their maximum personal gain (aka theft).

  3. Cohen says:

    Well it’s clear that Hoenig could never be the Fed chairman. He understands the situation too well and appears oblivious to politics. What a fool.

  4. Greg0658 says:

    this is to convenient of an opening to not ask what hit me like a brick yesterday .. I tried to do some research on my own yesterday and last evening on the www .. my mom asked me what these 2 sentences meant boldly on a cover letter to her bank statement :

    “effective September 12, 2009, the head office of the Federal Reserve Bank of Chicago will be reassigned to the Federal Reserve Bank of Cleveland. This action will result in 90 routing numbers becoming local holds with expedited availablity for a list of affected routing numbers, please visit your local branch of ___”

    I asked around in person .. a teller at the bank was not sure if it was cash routing issues only but heard something about the Federal Reserve System going from 12 to 8 primary banks … again it might be cash routing issues only

    I asked a couple bank execs (no reply yet) 1> TorF? 2> Why? cost savings / power grab / penalty for ___ ?

    at this time I have this in hand:
    Fed Res Bank of Chicago agenda for Sept11’09
    http://www.chicagofed.org/news_and_conferences/conferences_and_events/2009_frs_financial_literacy_agenda.cfm

    and this:
    “As of April 16, 2005, the Detroit Branch office of the Federal Reserve Bank of Chicago Coordinates:

    The Federal Reserve Bank of Chicago is one of twelve regional Reserve Banks that, along with the Board of Governors in Washington, D.C. no longer processes checks, and banks served by that office have been reassigned to the head office of the Federal Reserve Bank of ClevelandThe Federal Reserve Bank of Cleveland is the Cleveland-based headquarters of the U.S. Federal Reserve System’s Fourth District. The district is composed of Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.”

  5. Eric Davis says:

    Gee but what about bond holders…

    I guess it’s Capitalism for stock holders and faux capitalisum for bond holders…

    I wonder who else will get faux capitalism… Proly just capitalism for citizens and Peons.

    Beauty of a system we have! Capitalism for the suckers!

  6. DeDude says:

    He must be running for Fed Chair. At least it is a start. I think the government should take over banks regardless of size the way they did i Sweden. If they hold onto the weak assets for an appropriate time rather than selling it to vultures for firesale prices they actually don’t have to lose much. I am glad to see that FDIC has gotten to that realization and perhaps stop handing over absurd profits to private entities at the direct cost to FDIC.

  7. constantnormal says:

    @Eric Davis 8:29 am

    — if we ever do get real capitalism in the banking system, both stock and bond holders will get creamed. Of course, that is the only route to a stronger system, with those who have made poor choices getting wiped out, and those who have made better choices living to fight another day.

    @DeDude 9:08 am

    “If they hold onto the weak assets for an appropriate time rather than selling it to vultures for firesale prices they actually don’t have to lose much.”

    — I think you misunderestimate just how “weak” these toxic assets are. Most of them will not have any value, ever.

  8. davossherman@gmail.com says:

    The Fed is the first big bank that should be left to fail.

  9. DeDude says:

    Constantnormal; there is probably some assets that will end up yielding less than 10c on the $, but a lot of it appears to sell for more than that even in the current very weak market. All previous experiences suggests that during a crisis, market valuations are set way below actual long-term values. No reason to think that in the current crisis the markets are to optimistic.

  10. hopeImwrong says:

    DeDude – Don’t you know the current crisis has passed? Someone on TV said so.

  11. The Curmudgeon says:

    @Greg0658…

    I think in this particular instance there is little nefariousness involved. The Fed has been consolidating many of its check-processing operations in an effort to gain some efficiencies. The local Fed branch in my hometown, which was a branch office of the Fed Reserve Bank of Atlanta, effectively shut the branch down after building an uproariously expensive new office, with walnut-paneled walls and marble floors. So much for efficiency.

  12. DeDude says:

    HopeImWrong; those are Wall Street pimps, not people who have to put their money where their mounth is. The people who invest in distressed assets are still putting some fairly serious armaggedon scenarios into their bids, even though reality seem to indicate that the great O turned the Great Depression II into a Great Ressesion, that we will slowly be getting out of soon. The psychology in the distressed assets is currently is driven by fear so you should not sell such assests unless absolutely forced to it. I think the PPIP and similar programs should exclusively be used to purhase assets from FDIC (to save them from loses, that they pass on to good banks), not to produce absurd profits for China and PIMPCO.

  13. mknowles says:

    Nothing but the truth: Goldman Sacks and Dog Poop Futures – Max Keiser
    http://www.goldmansachs666.com/2009/08/goldman-sachs-dog-poop-futures.html

  14. constantnormal says:

    @DeDube 9:52 am

    “No reason to think that in the current crisis the markets are to optimistic.”

    If the replacement of mark-to-market accounting by a subjective “mark-to-whatever feels good to me” doen;t give you good reason to doubt the assessment of the current markets, I don’t know what will. I cannot think of a single instance in financial history where the rules of valuation have been so severely bent.

    http://blogs.reuters.com/rolfe-winkler/2009/08/19/when-genius-finally-gets-wise/

    http://blogs.reuters.com/rolfe-winkler/2009/08/17/americas-japanese-banks/

    I think we can disregard any valuation imposed by the markets under these conditions. The true value of the toxic assets is so bad that nobody who actually knows what they are wants the truth to come out. That’s enough to scare me away from any reliance on future value recovery. This is not like any other downturn in history — even in the Great Depression, they did not change the rules to hide the losses. While in most cases, the meme “this time it’s different” can be safely ignored, this time is the black swan where it is true.

    I presume you are a buyer of these beaten-down bankster stocks? Government backing, way under-valued assets, how could you lose?

  15. clawback says:

    Yes! The bondholders are the real issue here — and have been. Why haven’t the shareholders AND the bondholders been whacked? Why are we using taxpayer money to support the bondholders? Every time one of these f***ers (Geithner, Bernanke, Obama) appears in public, they should be hounded about why taxpayers are supporting the bondholders. (I wonder if Obama even knows what this means.) I understand the GSE’s involve the Chinese, but what about the banks? Is it just fear of all the CDS going ka-boom?

    “Debt for Equity Swaps NOW!”

  16. 1Eco says:

    My guess is it’s coming like a series of BIG WAVES, one, then two, then three, then four over the course of the next two or three years.

    It must be managed to allow for even more write down time to come and go. As for the dollar.

    The best time to buy is when everyone thinks it’s a sell. 3% bullish.

    The best time to sell is when everyone thinks it is a buy. 97% bullish.

    It’s China that gets slammed here. The baltic dry is being played big time. Why? Because here comes, oh hell, let me write a book about it and get rich like Barry.

    I am buying his book by the way and will report my findings ASAP. Better be some meat in there. First I need to go take out a micro loan to buy the hard back at B&N. Hell you earned it, Barry with that great article of the whole quarter..

    http://1eco.com/2009/07/20/what-is-gs-percentage-of-total-credit-exposure-to-risk-based-capital/

    I will need to get up your way and have you sign the damn thing. Might be a collectors item some day and I can get half my money back on ebay.

  17. constantnormal says:

    @Greg0658…

    I would second what The Curmudgeon says … (10:03 am).

    If you think about how much the nature of banking transactions has changed over the years, with more and more items being paid for by credit card, and then a single check (with more and more often an electronic transfer to pay that) written to pay the credit card bill, you can see that the volume of physical check-processing has probably declined a lot over the past 30 years, not at all keeping pace with the increase in the GDP or tracking the velocity of money. I wish I had a handy chart to show those relationships, but alas, it’s all just speculative hot air on my part.

    And when you factor in the reductions in spending in the current downturn, which are unlikely to bounce back after all the asset destruction, the need to have so many check-processing facilities declines a lot.

  18. Greg0658 says:

    thanks for the responses … what about the float issue and interest .. thats not going on these days with instant computer transactions? .. and remembered this post:

    http://www.ritholtz.com/blog/2009/01/fed-day-open-thread/#comment-142465
    “I also would like to suggest these 10 bullet proof banks be in each region of industrial America with a charter to invest locally and require them to watch and regulate outsource’g to outer regions and keep regional balanced books with PayGo in mind. Allow ad campaigns directed at its turf of people to use our credit card 1st please”

    As far as that “10 bullet proof banks” I wasn’t talking Fed Banks and not suggesting we had 2 to many. I also remember being informed by the MSM that “PayGo” doesn’t mean being balanced like above statement. “PayGo” means “you want this then give up that budgeted item”.

  19. cvienne says:

    @1Eco

    Hey 1Eco…

    I haven’t read too many of your posts here b4 (maybe I missed them), but I kinda like your style…

    Feel free to jump in at anytime…

    You’re somewhat CRYPTIC… But I DIG that brotha! :-)

  20. DeDude says:

    Constantnormal; The accounting rules and mark to fantasies are not the issue. Those have been instituted to prevent the velocity of bank failures to exceed the speed at which the FDIC can handle them (and/or where they precipitate another financial crisis). The question is whether the price you get for those assets in the current market are higher, lower or the same as what they will bring if you hold them another 1-3 years. In an atmosphere of fear the market will always give you lower prices than in an atmosphere of euporia (regardless of the actual underlying value of the asset). So you should not sell during periods of fear (unless you think Armageddon really is coming). The realities in selling low end residential real estate assets has been a heck of a lot better than the 30c on the dollar prices that the papers based on them sold for 6 month ago. Right now everybody is scared to death about the coming Armageddon in commercial real estate, so now is not the time to sell that stuff at market price. You never sell an asset when there is a glut and a high “fear and uncertainty discount” on that asset class. Why would I want to buy the Banksters stocks, when they are the ones forced (to a limited extend) to sell assets at the worst possible time – and also allowed to fudge the value of those assets to the high side?

  21. Greg0658 says:

    I found this graph:
    http://en.wikipedia.org/wiki/File:Assets_of_Federal_Reserve_Banks_from_1996-2009.jpg

    Imo supports my balanced regions .. America wake-up (ex NewYorkers your doin great) .. ie cash sifting thru your fingers … that was some expansion Feb’08 to Feb’09

  22. Greg0658 says:

    Also I think 10 super-banks operating in each of the 12 Fed Districts under the rules of “balanced imports/exports” inside of each region would be a good balance for capitalism competition and anti-TBTF.

    http://en.wikipedia.org/wiki/Community_Reinvestment_Act

  23. Greg0658 says:

    Institute a “flat sales tax” at say 1% (determined by each regions board of govenors).

    Institute a “cash transfer tax” say .01% on ALL cash transactions exporting cash from one region into another of the 12 regions or out of the USA determined by the USA Federal Board of Govenors.

  24. Greg0658 says:

    thanks Steve for the WS vs Main Street perspective ..
    Parris and Flav in charge of policy ..
    point being things are messed up .. isn’t it?
    me thinks they may be able to right the ship .. but KISS would take over
    .. and kiss the financial engineering industry into downsizing ..
    as it should after this meltdown