Another Fed President Criticizes And Volcker Calls For Change

Two Fed grey beards spoke out today, somewhat on different subjects but also with a common thread.

Thomas Hoenig, the President of the Kansas City Fed and the second longest serving Fed district bank president, called the Treasury’s bank rescue efforts to date ad-hoc and suggested it was time for decisive action.

From Bloomberg:

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

Banking regulators need to be willing to write down losses, bring in new managers and sell off businesses if institutions can’t survive on their own, “no matter what their size,” he said.

Mr. Hoenig also seemed to echo other voices that have been saying that overly large complex banks may not be in our best interests.

“We have been slow to face up to the fundamental problems in our financial system and reluctant to take decisive action with respect to failing institutions,” Kansas City Fed President Thomas Hoenig said in prepared remarks in Omaha, Nebraska. He called for a resolution process for firms deemed too big to fail, allowing their break-up if their complexity makes them unmanageable.

And this is where the revered Paul Volcker comes in. He said in a speech today in New York that bringing back Glass-Steagall or some variant of it.

Also from Bloomberg:

“Maybe we ought to have a kind of two-tier financial system,” Volcker, who heads President Barack Obama’s Economic Recovery Advisory Board, said today at a conference at New York University’s Stern School of Business.

There does seem to be some consensus coallescing around the idea the universal bank has proven to be a nightmare from a regulatory standpoint and less than a spectacular success as a business strategy. They are not only too big to fail but maybe too big for the government to seize and reorganize. The scope of their activities causes the regulators to seek make-shift resolutions when seizure is warranted.

As businesses there is scant evidence that they have delivered the returns that were projected. Penetration of traditional investment banking activities has been a middling success. Acquisitions of successful investment banks by commercial banks as a means of boosting market share have routinely turned out to be collosal wastes of money. Successes in generating fee business has too often come merely by using the balance sheet of the bank to bully clients into using advisory services, effectively rendering moot the concept of Chinese Walls that were supposed to eliminate the inherent conflicts involved in mixing the two types of business.

Simpler banking institutions which the regulators can routinely manage would seem to be an idea with merit. Investment banking could revert to its traditional role albeit more proscribed in order to prevent any institution from posing a systemic risk.

Like any other idea it sounds good on paper. You still have to square the idea with the European mode. Good luck there.

Share

Related Posts

You can leave a response, or trackback from your own site.

Leave a Reply