Too-big-to-fail concept institutionalized: Fed's Hoenig

Market Watch ^ | 6/30/09

[FromLori]

NEW YORK (MarketWatch) -- Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, was critical of the government's "ad hoc" rescue efforts during the financial crisis, saying that those actions have institutionalized the concept of "too big to fail" in our economic system.

"The current crisis has made it clear that the group of systemically important firms that might be deemed worthy of special consideration by policy-makers is larger than previously thought," Hoenig said in a Tuesday speech at New York University.

Small banks see a competitive advantage flowing to larger firms, he added.

Fed Chairman Ben Bernanke has argued that he, along with others, had behaved in the manner of an emergency crew that needs to save a burning home before it destroys an entire neighborhood -- without first asking whether the fire was started carelessly.

'If the fire was started by a homeowner who ignored fire codes and smokes in bed, should the neighbors be required to rebuild the home at twice its original size at their expense?'

Hoenig asked in response: "If the fire was started by a homeowner who ignored fire codes and smokes in bed, should the neighbors be required to rebuild the home at twice its original size at their expense?"

The government's rescue of Wall Street was orchestrated by a small group of Fed officials, including Bernanke and Timothy Geithner, then president of the Federal Reserve Bank of New York and now secretary of the Treasury. Then-Treasury Secretary Henry Paulson was the point man for the Bush administration.

These officials and their key aides orchestrated the rescues of American International Group Inc., Bear Stearns, Fannie Mae and Freddie Mac, as well as Merrill Lynch.

With the financial crisis abating, other Fed officials have begun to question some of the decisions