Federal Reserve President Announces "Dismemberment" Of Large Financial Institutions Should Be Considered

Tyler Durden's picture

Bad news for fixed income market monopolist Goldman Sachs. Kansas City Fed President Thomas Hoenig, in response to a question from University of Maryland Professor Carmen Reinhardt said "dismembering firms is a fair thing to consider." Hoenig further clarified that regulators "have people who are experts who understand what's going on inside institutions who could figure out how to carve out" some parts of a financial institution if they are taking undue risks with taxpayer backing." Surely, we expect Lloyd Blankfein to comment promptly on how even the Federal Reserve is now thoroughly underappreciating the divine nature of its prop/flow-focused business model, and how originating the proactively entire volume of OTC quote flow is just a natural side effect of completely cornering the CDS, bond and loan market.

More details from Market News:

Hoenig said there is a strong tendency in financial crises to bail out firms, but he said that in some instances "you have to allow institutions to fail and then have renewal."

He emphasized the need to have an FDIC-style resolution authority to deal with insolvent institutions which could seize a systemically important financial firm before it fails, change management, impose losses on shareholders and "put creditors in an adverse position."

Under Hoenig's scheme shareholders would be "wiped out," while "longer term secure creditors are protected but don't have immediate access to their funds."

He said regulators should "designate banks in advance that are systemically important" and make clear what steps will be taken if they become insolvent. In the meantime, he said regulators should apply certain rules, such as "substantially higher" capital requirements and loan-to-value ratios. He suggested banks with $50 billion or more of assets should be so designated.

"You really do need to have process for dealing with failing institutions," said Hoenig.

"Preparation is really important," he said. "We have to define 'systemic' to get things started to deal with this issue" of too big to fail.

The larger "systemic" banks and their creditors should be "put them on notice ...not that they're going to be bailed out, but that they're not going to be bailed out ... so creditors are not as protected."

Hoenig said that if creditors know they bear more risk in the event of failure, he said that should "begin to mitigate moral hazard."

All of this is certain to incite another PR fiasco by Goldman, which (rightfully) will realize that the Fed President's words are aimed squarely at its operations.

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Hondo's picture

I know they won't listen to him but he on the money.......make him the Chairman.

Anonymous's picture

that is exactly the reason he will never be considered

john_connor's picture

Hoenig has always been a voice of reason because he represents a smaller market that is disassociated from the NY banking cartel.

The NY Fed holds all the power; the other governers can only aqcuiesce

Miyagi_san's picture

 GS is doing "Gods work" and the Fed has people that know exactly whats going on...and they want to dismember someone. It sounds like JPM just got a lot bigger, TBTF is so last year.  

merehuman's picture

Furthering Gods Work.  At workers.org is article describing bloodsuckers springing up along the s. border. Turns out the unemployed sell their plasma. Were getting 80.00 per week, now only 60.00 due to profit taking by suppliers of materials.  This may prove to be a growth industry.

I added this since its relevance is the STRIPPING, RAPING of our country and its people. This  sale of ones plasma is done when utterly poor and devoid of all other options.

I sold plasma years ago, hoboing in Corpus Cristy. 18.00 dollars at that time and i bought a squeegy with the money, found a bucket, got paper towels from gas station and commenced washing store fronts. Later that day i had a good meal and moved on. Knowing from experience what its like to be poor makes for effective money management later in life for some of us.

Trifecta Man's picture

TBTF = United Crooks of America

Anonymous's picture

it's either more kabuki or this guy doesn't place much value on his life.

Racer's picture

They shouldn't need 4 Trillion in bail out money then should they!!


lsbumblebee's picture

This is a joke. The banks are already insolvent. Did we forget "mark to fantasy"?

TraderMark's picture

Would they consider dismembering their own TBTF institution? i.e the Fed ;)

Anonymous's picture

Don't listen what I'm saying, watch me what I'm doing.

If what Hoenig says is implemented, it will foremost raise the funding costs of banks and thus undo most of Ben's rate cuts. Banks will be only able to borrow cheaply from the Fed, which is more or less an implicit guarantee by the gov't as major creditor. What is the difference between government guarantee and bailout? I am strugging to see it from any perspective.

Scooby Dooby Doo's picture

Barney Rubble made a statement a few months ago when asked if the TBTF should be broken up.

"Show me how to do it".

Maybe these two should be put in the same room for a spirited debate. The ultimate dog & pony show regarding TBTF.

Anonymous's picture

I think Hoenig is correct and that we do need to have process for dealing with failing institutions. So now that the Federal Reserve is essentially insolvent, what is the plan for disolving it?

buzzsaw99's picture

fed ded heds love only big banks and money

Anonymous's picture

Sounds good. But will they put it into practice? They should. Is he trying to nudge the other Fed presidents? Is the Fed floating an idea? It is floating the idea out of genuine interest, or is it floating it to deflect efforts such as audit the Fed? Or could he be trying to position himself in case Bernanke's Senate confirmation doesn't go so well? Would love to know. Probably never will.

deadhead's picture

"...or is it floating it to deflect efforts such as audit the Fed?"

This part is your answer.

This is all just talk just like the talk of an exit strategy.

Let's see, polls are showing that a huge majority of Americans hate the banks.  This is just the Fed's way of trying to appease the growing anger.  Hell, even Geithner talks a bit about breaking up the TBTFs as well as the strong dollar mantra.  I would suggest that you consider anything coming out of Geithner, Bernanke (or any other fed subservient governor) Summers simply a bunch of bullshit.

the Fed is not going to "exit" anything for a very, very long time.  and once it is obvious that their policies, once again, have been a failure, there will be any number of geopolitical events to blame it on.

Lexington Duffet's picture

The failure of the "Too big to fail" fantasy underscores another reason why the decision to weaken (not enforce I'd say) the anti-trust laws was a poorly reasoned policy.  

Or maybe I should say, the decision not to enforce the anti-trust laws--a policy started with Mr. Reagan and his crew -- worked in the way it should be expected to work:  it enriched the few who run, own and work for the (overlarge) business; everyone else took it in the shorts.  

Even Mr. Hayek in his Road to Serfdom opined that the anti-trust laws were good laws necessary to protect society from small groups overreaching.  The right forget that part of his book, and others like it, when quoting the work.

Latest from a Pub friend who does a lot of bank law work:  hates the Prez O; hates the bailout; hates everything demo; hates possible new taxes; he and his firm are making a mint doing legal work collecting $ for what should be a defunct bank running off TARP funds and fantasy bookkeeping.  Without the TARP and so forth cut their income by at least 50% to 70%.



bugs_'s picture

The Munder DisMEMBERment Fund! LOL.

Nice to know the position of the Kansas City Fed.

Carmen got more than she bargained for!

Careless Whisper's picture

lloyd and Hank wacked the Lehman boys and Gotti wacked Castellano. It's more profitable without the competition.





Cognitive Dissonance's picture

"dismembering firms is a fair thing to consider."

When we begin carving up the TBTF banks, I want it done without anesthetic and in front of a live audience, Roman coliseum style. And I'll take a heaping helping of white meat and a wing while you're at it.