Fed Official: ‘We Do Not Have To Wait For New Authority’ To Take Over Failing Financial Institutions

hoenig.jpgAccording to the Obama administration, one of the problems in addressing the economic crisis is that no mechanism exists for taking over large, complex financial institutions. The administration has actually crafted a plan that would grant the Treasury Secretary such power, which it may present to Congress.

Today, Kansas City Fed President Thomas Hoenig said that new legislation is all well and good, but in the case of at least some big firms, that power already exists:

There has been much talk lately about a new resolution process for systemically important firms that Congress could enact, and I would encourage this be implemented as quickly as possible, but we do not have to wait for new authority. We can act immediately, using essentially the same steps we used for Continental.

It’s unclear to which firms Hoenig thinks this authority is applicable. Since AIG is still, technically, an insurance company, it would seem to fall outside the sphere of any existing power that Treasury has. But maybe the administration really doesn’t need some new mechanism to take over a Citigroup or a Bank of America.

This brings us back to the IndyMac example. IndyMac was successfully re-privatized last month, after it had been taken over and cleaned up by the Federal Deposit Insurance Corp. (FDIC). For his part, Hoenig alluded to a similar situation at Continental Illinois, which was taken over by the FDIC in 1984. This week, Elizabeth Warren’s Congressional Oversight Panel also presented Continental as an example for the administration to study:

Another option is government reorganization of troubled financial institutions using conservatorships, as in the case of Continental Illinois in the U.S. and the financial crisis in Sweden in the 1990s. This approach entails an in-place reorganization in which bad assets are removed, failed managers are replaced, and parts of the business are spun off.

In the end, it’s probably best that Congress formally structure some new authority for unwinding large, financial institutions, instead of Treasury relying on the exact same system used for IndyMac and Continental. After all, those were just banks, not globally entwined financial behemoths, and they were only cleaned up, not broken into smaller entities. But the underlying premise remains — the federal government, in one way or another, needs to find a way to unwind the firms that are “too large to fail” and too weak to succeed.