“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Glass Steagall Act was an effective deterrent to TBTF from when it was enacted in 1932 to 1999 when Glass-Stegall was repealed.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).

Category: Bailouts, Federal Reserve, Regulation

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.

29 Responses to “Hoenig: The New GSEs Are Citi, Bank of America”

  1. 1 currency now says:

    Yes they are public utilities. Just like the FDIC and the Fed itself, which carry the full faith and credit of the US taxpayer.

    The Fed should not continue to be allowed to operate in secret. Even the Supreme Court knew enough to deny cert without comment on the banks’ ‘opacity’ argument.

  2. Chief Tomahawk says:

    Is it too little too late?

    I checked http://www.condo.com for Las Vegas last night and a MGM property (MGM Signature Tower) has just listed 225+ units for sale in one of their recent constructions. It sure seems like an attempt to move the shadow inventory most likely because they believe there is further downside ahead. Now will their move break the dam? We’ll soon know whether other Vegas properties follow suit and list their shadow inventory as well. And will Vegas be ‘the canary in the coal mine’ in terms of shadow inventory being brought forward in all markets?

  3. machinehead says:

    ‘Commercial banks receive special funding privileges from the Federal Reserve; therefore, they should be limited to just taking deposits, making loans and processing payments.”

    Hear, hear! It was a freaking outrage that Goldman Sachs and Morgan Stanley were whooped through to qualify as ‘commercial banks’ during the 2008 crisis — even the statutory 30-day waiting period was waived.

    But it’s more outrageous that they are STILL entitled to zero percent ‘free money’ from the Federal Reserve spigot.

    Why is this not a populist political issue? Subsidized financing for investment banks is an ongoing, flagrant scandal. Hoenig is right to point it out. But since his agency is the one unsnapping its nursing bra to extend its bloated sugar teat to the hungry investment banksters, his cry can be interpreted as an insider’s plea to ‘Stop us before we strike again.’

  4. realgm says:

    I like Thomas Hoenig when he always went against Bernanke last year on QE 1.5/2. Unfortunately, it’s all Ben Bernanke and his banker friends nowadays.

    When would the Americans wake up against these non sense? When would be a true leader to be selected as president and start doing the right things?

  5. Chad says:

    Shame we can’t vote for Fed Chairman…Hoenig would have my vote just on those points.

  6. rktbrkr says:

    This is like the weather, every body keeps talking about what should be done but effective lobbying by the TBTF prevents common sense regulation . If you’re TBTF then you’re too big to regulate (TBTR), the Fed keeps volunteering but they’re just a TBTR enabler, they’re controlled by those who they want more regulatory power over

  7. wally says:

    Hoenig is just a token, don’t you think? Even if the whole Fed believed what he says, they’d do nothing.

  8. Global Eyes says:

    Hoenig’s remarks regarding banks sound so Swedish.

  9. each says:

    Don’t forget Hoenig retires in October. However, he has long been critical of recent FRB actions.

  10. b_thunder says:

    Hoenig, obviously, makes very good points. Barry also made an excellent presentation. Too bad that all that efforts falls on “deaf ears” of the “extend and pretend” preservationists, rather than true the top law enforcement officers of the states:


    Yes, the state AGs are going to settle with big banks over bank fraud. No jail time, not even civil lawsuits against bank execs who clearly broke the law. Deterrent – what deterrent? Every settlement reinforces “too big to fail” and “too important to do time” beliefs.

    Trying to convince Federal and State bank regulators that until the cancer is cut from the body, the body cannot recover is a waste of time.

  11. klhoughton says:

    Hoenig has made these points continually over the past several years. The second-highest-paid Fed Governor is consistent that the Bernanke/Paulson regime made managerial/organizational mistakes that have been perpetuated to their detriment by Bernanke/Geithner.

    He’s also consistent that rates should be raised immediately, possibly to 1%.

    Any hints from him as to how he holds both of those views: that the financial system would be on life-support (at best) without the implicit Fed guarantee but that things are rosy enough that we need to tighten to address inflation in a realm of well-above-NAIRU unemployment? If that implicit guarantee really is worth more than 75 bps in his mind, cash-in-the-mattress is looking better all the time.

  12. ruetheday says:

    Hoenig is spot on. We need to get back to a financial system that focuses on intermediating between real savers and real borrowers, between real companies and real investors, as opposed to a system where almost all of the activity is focused on placing enormously leveraged bets on short term secondary market movements.

    This is not a new revelation:

    “Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money.”
    – Irving Fisher, 1933

    “Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation.”
    – John Maynard Keynes, 1936

  13. jpmist says:

    Huzzah Hoenig! Can we vote him Fed Prez?

    One thing that keeps me awake at night is that if the Fed & Treasury is willing to take so much crap on their obvious subservience to The Banksters it must mean that The Banksters are in worst shape than we could possibly imagine.

    Bernake said himself that there was a week in 2008 when 12 of the 13 most important banking institutions were insolvent. “Mark to model” improved the appearance of their balance sheets since then but, by the Fed & Treasury’s actions, isn’t the reality that they’re still insolvent?

  14. DeDude says:

    All of those point are excellent. I would love to hear rationale arguments from those who do not agree. He must have brought this out at the Fed meetings, what do the others say to defend the current outrages.

  15. louis says:

    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)

    That is only for the citizens. It would be morally wrong to hold the banks to this simple logic of capitalism.

  16. patfla says:


    “banks should that risks with their own capital”

    but rather

    “banks should take risks with their own capital”

    For one, the latter is easier to understand.

  17. [...] The TBTF banks are the new GSEs.  (Big Picture) [...]

  18. Bill Wilson says:

    That’s the kind of talk I like to here, but it’s still just talk.

    I don’t think any real change will come until we are forced to change. Up to this point, every crisis has been an opportunity for the banking sector to consolidate. Even when it destroys itself it becomes stronger.

    Based on the tax negotiations in December and the recent budget negotiations, I would say our elected officials have no interest in making tough choices or disappointing lobbyists. I’m not just saying this to whine, there’s an investment strategy in there somewhere.

  19. AHodge says:

    wow missed this –thanks
    Laurel wreaths and the hall of heros for Hoenig.

    but wait–there is no speech text or even the event on their web, and he is retiring in Oct.
    Another venting like volckers last private speech?

    still— about as solid a banking vision as there is…
    maybe we get to it after the next crash

  20. machinehead says:

    A. Hodge — Hoenig’s speech is a replay of Dwight Eisenhower warning about the military-industrial complex … just as his last term was ending, and it was too late for him to do anything about it.

    Similarly, Hoenig spilled the beans about the Fed’s coddling of TBTF banks. As he walked off the stage, Ben’s bodyguards rolled him, tore off his epaulets, confiscated his decoder ring, and shoved him out an unmarked back door into a trash-strewn alleyway. ‘See ya, gov!’ they mocked the defrocked boffin.

  21. KJ Foehr says:

    This issue is just like the weather: everybody complains about it, but nobody can do anything about it.

    Why not? Because the TBTF banks control the weather.

    And that won’t change until We demand it be changed.

  22. DealBook says:


    The Big Banks are the New G.S.E.’s: Barry Ritholtz was taken by a speech by the president of the Federal Reserve Bank of Kansas City, Thomas Hoenig, who, he said “made one of the most cogent persuasive arguments against ‘too big to fail’ I’ve heard from any public official outside of Volcker.”

  23. philipat says:

    Maybe TH is an avide reader of TBP? This common sense position has, I believe, been thrashed out here on many prior occasions. Unfortunately, common sense nolonger makes any difference in the United Corporatocracy and I fear we will still be thrashing it out many times again. So long as Congress remains a wholly-owned subsidiary of Wall St., it’s difficult to see anything changing?

  24. philipat says:

    “Avid”. But “Avide” sounds like a nice word also?

  25. hammerandtong2001 says:

    Gee, compared to Con Ed, they sure get paid pretty well.


  26. duaneteddy says:

    Hoenig is obviously spot on. But are the banking lobbyists going to allow rules like this. NO F***ing way. They have the politicians in their pockets with their campaign contributions. The solution is to prohibit banks,corporations and individuals with more than say $1 million net worth from making contributions to candidates or any elected officials. The government can fund their campaigns with reasonable amounts and it should be mandatory not optional.
    Side benefit-getting rid of (or limiting) those annoying TV political advertisements around election day.

  27. andreveloso says:

    Funny how Hoenig words, Taleb (which has also said many times about banks as utility companies), Volcker, Glass-Steagal act, all say it without admitting it: we need the END OF FRACTIONAL-RESERVE LENDING. We need 100% reverse banking. No need for a thousand regulations and regulators when a simple measure is so obvious. Readers of this blog should read a post called “The Apropos of everything” and this small book: http://mises.org/books/fed.pdf


    BR: That is not at all what they are saying — but it is your issue.

    “To the man whose only tool is a hammer, everything soon begins to look like a nail . . .”

  28. Bill Wilson says:

    I’m sympathetic to the END OF FRACTIONAL RESERVE LENDING argument. I’m not sure if there would be enough capital without some form of bank leverage, but, in the interest of stability, I’d like leverage to be as low as possible. Certainly, the number should not be one picked by Larry Summers.

    I’d like to see a few things happen.
    1. Bring back Glass-Steagal
    2. Size limits for financial institutions, no more TBTF.
    3. Set the ratio used in fractional reserve lending as low as possible. Maybe 5:1.