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Hoenig: The New GSEs Are Citi, Bank of America

Posted By Barry Ritholtz On April 13, 2011 @ 10:38 am In Bailouts,Federal Reserve,Regulation | Comments Disabled

“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 [1], the speaker who followed me was Kansas City Federal Reserve President Thomas Hoenig [2]. 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Glass Steagall Act was an effective deterrent to TBTF from when it was enacted in 1932 to 1999 when Glass-Stegall was repealed.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 [3]
(Hoenig’s comments on the Volcker Rule).

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2011/04/hoenig-the-new-gses-are-citi-bank-of-america/

URLs in this post:

[1] National Association of Attorneys General meeting: http://www.ritholtz.com/blog/2011/04/attorneys-general-keynote/

[2] Thomas Hoenig: http://www.kc.frb.org/speechbio/hoenig.cfm

[3] Volcker Rule Activity Restrictions: http://www.kc.frb.org/SpeechBio/HoenigPDF/VolckerRuleComments.03.02.10.pdf

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