Hoenig Says Separate Banks by Function, Not Size
August 8, 2012 • 8:38AM

Scores of bank economists and financial journalists have leaped into action, post-Sanford Weill, to speculate on the idiotic question of whether particular financial firm A or B would have gone bankrupt without Glass-Steagall's repeal.

FDIC Commmissioner and Glass-Steagall advocate Thomas Hoenig, in a CNBC interview Aug. 3, attacked this foolishness and, more importantly, the "anti-Wall Street" countergang to Glass-Steagall: Shrink the too-big-to-fail banks. This is put forward in new banking legislation by Sens. Sherrod Brown and Bernie Sanders, Rep. Brad Miller in the House, and others intimidated by Obama and Geithner against supporting the Glass-Steagall restoration they know is needed.

In Hoenig's discussion with three CNBC anchors, nobody mentioned the Glass-Steagall legislation in Congress. But Hoenig argued strongly against "breaking up banks by size", and against "higher capital requirements", as solutions that will not work. He also insisted that with current banking policy, massive bailouts of big banks WILL be done again in another wave of crisis, Dodd-Frank notwithstanding.

The only effective policy, Hoenig said, is to break up the banks "by lines of business; break them up by function, not by size"; and secondly, strictly restrict the "bank safety net" to the commercial banking function, leaving everything else on its own — let it "win-lose", as he said, as opposed to commercial banking's "win-win". These two policy pillars characterize Glass-Steagall.

After discussing the superiority of the U.S. 20th-Century model of commercial banking, to the European model of universal, or "concentrated" banking, Hoenig dismissed the CNBC interviewers' usual arguments about AIG, Bear Stearns, etc., saying that the banking system as a whole is the subject. By breaking down separation, he said, all financial institutions were allowed to "leverage up" and speculate with much higher risk. And since the collapse, claims of higher capital ratios are largely bogus, he argued. The big banks are using their "bailout borrowing discounts" to pile up contingent capital, Hoenig said, while their real tangible capital remains no more than 5% of assets (20:1 leverage) whereas "through most of the 20th Century" it was 10%.