Hoenig on Resolution Authority

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"Hoenig on Resolution Authority"

There’s a slightly odd fad on the left for really loving progressive-ish ideas when they come from a rightwinger. So there’s a lot of interest in Kansas City Fed President Thomas M. Hoenig’s tough views on bank regulation since he not only has tough views on bank regulation, he’s also a hard-core rightwinger. My view is that this is a bit backwards—Hoenig is a hard-core rightwinger whose overall views on monetary issues evince very little concern for the welfare of average people. To me, this makes his tough views on cracking down on Wall Street seem a bit to me like special pleading on behalf of the interests of medium-sized banks (his constituency in his role as Kansas City Fed president) rather than about the overall welfare of the country.

So with that somewhat skeptical preface, this aspect of his critique of Chris Dodd’s bill does seem worthy of concern:

“What I worry about [is] if you have a large institution, and it got into very serious trouble and you only have a weekend to take care of it, the procedures under the Dodd bill would make that very difficult,” Hoenig said.

Let’s say you were coming into Monday morning and you didn’t have the ability to get to the judges in time to get this thing approved, and you had to get to another day. What you would tend to do is lend to that institution — if it were not a commercial bank, you would even use the [Fed's] so-called 13-3 authority… and you would lend to it,” he said in a reference to the legal authority that the Fed claimed gave it the power to lend taxpayer money to AIG. “So you would still have it as an operating bank, you would not have taken control of it, not put it in receivership yet, and yet you would be bailing it out. That’s what we have to avoid.

“There’s still this desire to leave discretion in the hands of the Secretary of the Treasury, and while I understand that desire — because you never know what the circumstance is going to be — the problem is in those circumstances you always take the path of least resistance because of the nature of the crisis.

“You don’t want to be the person responsible for the meltdown, so you take the exception and you move it through.”

The establishment of a resolution procedure for dealing with failures at diversified financial institutions seems to me to be the best and most important part of Dodd’s bill. Except it’s not good or important if it doesn’t actually work! It certainly seems to be the intention of Dodd and his staff to set something up that works, which is good. But whether or not it’s actually the case that what they’ve written will work is something that it’s difficult for me to judge. The fact that a bank regulator with Hoenig’s level of experience thinks it won’t is a major red flag.

This is definitely something we’re going to need to hear more about, because at first blush I don’t see any reason to think that half-measures in this regard have real value. The process is either something workable or it isn’t.

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