Too Big Has Failed

by Scott Loftesness on March 8, 2009

in Banking Industry, Credit Crisis, Scott Loftesness

Late last week, Thomas M. Hoenig, President and Chief Executive Officer of the Federal Reserve Bank of Kansas City, gave a speech in Omaha titled “Too Big Has Failed“.

A lesson to be drawn from Continental is that even large banks can be dealt with in a
manner that imposes market discipline on management and stockholders, while controlling taxpayer losses. The FDIC’s asset disposition model in Continental, which used incentive fees and contracts with outside specialists, also proved to be an effective and workable model. This model was employed again in the failure of Bank of New England in 1991, the failures of nearly all of the large banking organizations in Texas in the 1980s, and also for the Resolution Trust Corporation, which was set up to liquidate failed thrifts.

He goes on to conclude:

If an institution’s management has failed the test of the marketplace, these managers should be replaced. They should not be given public funds and then micro-managed, as we are now doing under TARP, with a set of political strings attached.

Read the whole paper – he’s very thoughtful about his analysis and prescriptions.

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