Hoenig Hits Treasury for Lack of ‘Decisive’ Action
The U.S. Treasury has failed to take “decisive” action to address the bank crisis, pursuing an ad- hoc approach that leaves management in place and avoids necessary asset writedowns, a veteran Federal Reserve official said.
“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.
Hoenig’s comments are the most detailed criticism of the Treasury’s actions by a Fed official since the financial crisis began. He joins a growing number of observers, from ex-Treasury Secretary James Baker to former Fed chief Alan Greenspan, to favor temporary government takeovers of financial firms hobbled by distressed mortgage assets.
Fed Chairman Ben S. Bernanke has endorsed the approaches taken by Treasury Secretary Timothy Geithner and his predecessor. The Treasury has spent most of its $700 billion financial stability fund on buying stakes in banks without taking management control.
Geithner’s Plan
Geithner has ordered a so-called stress test for the largest 19 U.S. banks to determine whether they need more capital, and told lawmakers that more congressionally approved funds may be needed. He has stressed that nationalization isn’t the goal.
Hoenig said while policy makers “understandably” want to avoid nationalizing banks, “we nevertheless are drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis.”
Hoenig, 62, is the second-longest serving of the Fed district bank presidents, after Minneapolis’s Gary Stern. He next votes on the Fed’s policy-setting Open Market Committee in 2010.
The Treasury’s $700 billion fund “began without a clear set of principles and has proceeded with what seems to be an ad-hoc and less-than-transparent approach,” said Hoenig.
The Standard & Poor’s 500 Financials Index has slumped 40 percent since Geithner announced his outline for bolstering the financial industry. Along with the stress tests, the main efforts include backing a $1 trillion Fed program to restart the market for securities backed by loans and a $1 trillion initiative to remove devalued mortgage debt from banks’ balance sheets equifax free credit report.
Repeated Bailouts
Since Geithner’s Feb. 10 speech, the U.S. has been forced to restructure its rescues of both Citigroup Inc. and American International Group Inc.
With Citigroup, the government moved to convert some of the preferred stock it owned in the bank to common shares, gaining a 36 percent stake in the company and boosting Citigroup’s buffer against future losses. While authorities pushed for changes to the makeup of Citigroup’s board, Chief Executive Officer Vikram Pandit remains at the helm. Citigroup shares hit $0.97 yesterday.
Hoenig blasted the practice of keeping managers of failing companies in place.
“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.
Temporary Takeovers
Hoenig said the process used in temporarily taking over failing banks can be applied for all financial institutions, citing the Federal Deposit Insurance Corp. takeover of Continental Illinois National Bank & Trust Co. in 1984.
A resolution process can be set up for systemically important banks, bank-holding companies and other financial institutions, using receivership, or “bridge bank” powers to continue to operate them under new management, he said.
Bernanke has repeatedly called on Congress to consider legislation to give U.S. financial regulators the ability to shut down a complex bank-holding company. He has said that while the FDIC has such power to take over and resolve failing deposit- taking institutions, there is no similar framework for firms that span banking to securities trading and insurance.