In a move that should send shivers up the spines of management at Citigroup Inc. (NYSE:C) and American International Group (NYSE:AIG), Kansas City Federal Reserve President Thomas Hoenig
told Congress Tuesday that any so-called "too big to fail" financial institutions should be allowed to go under in order to restore confidence in the financial system.
And while he is far from the first person to call for letting market forces deal with the weak, his position as a voting member of the Federal Reserve will have troubled institutions taking his opinion into account before asking for more government help.
Charging that the bailouts through the TARP program were creating uncertainty and slowing recovery, Hoenig bluntly began with:
"The United States currently faces economic turmoil related directly to a loss of confidence in our largest financial institutions because policymakers accepted the idea that some firms are just 'too big to fail.' I do not. Despite record levels of expenditures, we have not seen the return of confidence and transparency to financial markets leaving lenders and investors wary of making new commitments. Until confidence is restored, a full economic recovery cannot be achieved," he said in prepared remarks. "Insolvent firms must be allowed to fail regardless of their size, market position or the complexity of operations."Acknowledging that letting big banks go the way of Lehman Brothers Holdings Inc. would be hard, Hoenig advocates taking an important step of preforming triage on systemically important institutions, with the viable firms helped to raise more capital publicly or privately while the nonviable institutions are put into conservatorship. -
George White See Hoenig's full remarks
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